If you operate as a VAT-registered business, you might have recently received correspondence, either in the form of a letter or email, from HMRC, notifying you about the implementation of the new penalty system for Making Tax Digital (MTD) for VAT.
Starting at the beginning of this year, this system has been designed to offer a more straightforward approach to penalizing late submissions and payments of VAT, with the aim of rendering these penalties fairer and more proportional to taxpayers.
While the term ‘penalties’ might initially evoke negative connotations, it’s worth noting that MTD compliance brings about a host of benefits. Small businesses and their advisors can leverage MTD for VAT as a catalyst for their digital transformation journey. This presents a valuable opportunity to integrate these tools into their operations, enhancing efficiency not only in the tax-related processes but also across their entire business landscape.
Nevertheless, it’s important to recognize that failing to comply with MTD requirements can now lead to tangible repercussions. To help you stay well-informed and avoid any unwelcome surprises, we have outlined the penalties associated with non-compliance.
These Growthwork accounting software offer employers an affordable solution with fewer fiduciary responsibilities, but somewhat less control for employers and plan participants. Find out how Growthwork accounting software can help.
What is the MTD penalty system?
The new points-based penalty system for Making Tax Digital (MTD) is set to take effect starting in January 2023. Under this system, missing a submission deadline will result in the accumulation of penalty points. The severity of penalties for non-compliance with MTD will vary depending on your submission frequency.
Businesses that consistently miss deadlines will amass points, which can ultimately lead to fines if they exceed a specified threshold. Additionally, there are other ways you can incur penalties, such as failing to maintain digital records or digital links.
If you submit your tax information annually, you will trigger a penalty if you accumulate two points. Quarterly submissions will result in a penalty after accumulating four points. This same rule applies to MTD for Income Tax Self Assessment (ITSA). For those who submit monthly, reaching five points will lead to a penalty.
Once you reach your submission penalty threshold, you will be subject to fines.
It’s important to note that you do have the option to appeal both points and penalties for MTD. However, to do so, you must follow the reviews and appeals process and provide a valid, reasonable excuse for missing a deadline.
When is the penalty system initiated?
The new penalty system is scheduled to launch in January 2023 alongside the introduction of Making Tax Digital for VAT, supplanting the current penalty framework. As for non-VAT registered sole traders and landlords, they can expect penalties to be enforced once Making Tax Digital for Income Tax Self-Assessment (ITSA) is implemented in April 2024.
Do MTD penalty points expire?
MTD penalty points have a validity period of two years, starting from the month following their issuance. To illustrate, if you were issued a penalty point in April, the countdown commences in May. It’s important to note that points remain active as long as you are within the penalty threshold.
How can I avoid penalties?
You will maintain a separate points total for each submission obligation you hold. This means that if you are required to submit a VAT return and also need to adhere to Making Tax Digital (MTD) rules for Income Tax Self Assessment (ITSA), which involves quarterly updates, you could accumulate points for each of these obligations independently.
When it comes to compliance, the process is straightforward: just adhere to the rules. Ensure that you have the necessary compatible software and digital links in place, and make sure you submit the required information on time.
It’s crucial to bear in mind that as the new points-based system is implemented, taxpayers who consistently comply but occasionally make errors will not face excessive penalties. Penalties and sanctions will only be imposed on those who consistently fail to comply.
Keeping this in perspective, you can set aside concerns about punitive measures and instead focus on the benefits of digital transformation and increased efficiency for your business.
Did you find this article helpful? Email it to a colleague or share on your social media platform using the buttons under the article’s title at the top of this page.