Making Tax Digital – Facts you need to know

Making Tax Digital (MTD) for VAT is upon us, and with 1 April 2020 set to become the pinch point for businesses above the VAT threshold to have their records…

Making Tax Digital (MTD) for VAT is upon us, and with 1 April 2020 set to become the pinch point for businesses above the VAT threshold to have their records and reports fully digitalised, many Accountants and commercial businesses are scrambling to get their ducks in a row.

Although 1.2 million businesses are affected by the changes, only half had signed up as of 11th of July 2019 according to the HMRC.

To demystify MTD penalties, we outline 3 Making Tax Digital facts you need to know, which will carry you through to 2020 when more amendments to the current legislation are set to be rolled out.

3 Making Tax Digital facts you need to know

Not all businesses are eligible for HMRC’s MTD for VAT

As of 1 April 2019, VAT registered businesses with a taxable turnover above £85,000 are required to use the Making Tax Digital system to file their VAT return through compatible software. Businesses below the VAT threshold can choose to sign up for MTD voluntarily.

There will be some exceptions to these rules, dependent on specific business circumstances, and some businesses may be eligible for exemption from MTD for VAT. Be sure to confirm this with HMRC here.

If you’re not eligible to sign up to MTD, you will need to continue filing VAT returns as you have done or through your existing VAT filing system or through HMRC’s website.

‘Soft-landing’ period is no excuse to dawdle

HMRC has described the first year of MTD for VAT as a ‘soft landing period’ which they explain is a period of time for businesses to have in place digital links between all parts of their functional compatible software.

Although the 1st of April was not a ‘cliff edge’ for sign-ups to MTD, the deadline for the first returns under the new system for the majority of businesses, which file VAT quarterly will fall on the 7th of August.

The Chancellor then confirmed in the 2019 Spring Statement that HMRC would take a ‘light touch’ approach to late filing and record-keeping mistakes in instances where businesses do their best to comply with the regulation.

While the Chancellor’s statement is about leniency for issuing penalties, reading between the lines, there are two scenarios which may be considered a penalty offence:

If your business is not doing its best to comply with MTD VAT filing and record keeping
If your business pays its VAT bill late

While VAT filing deadline might not come under such harsh scrutiny in the first year of MTD for VAT, if you miss a payment deadline you will enter a 12-month period during which you may well have to pay a surcharge on top of your existing VAT bill if you continue to miss deadlines.

New penalty points system for VAT is coming in 2020

Following the soft-landing period, HMRC will update the VAT penalty system to bring it more in line with the penalties for late submission and payment of Income Tax and Corporation Tax. This will be based on a penalty points system and late VAT submissions will accrue penalty points as follows:

One penalty point for a missed VAT return.
A fine after four accumulated points for a missed quarterly VAT return.
A fine after four accumulated points for a missed monthly VAT return.
Penalty points will last for two years before they expire.

Find out more about the current Making Tax Digital penalties here