The small business guide to MTD for VAT penalties

This blog was first published in April 2022 and updated in January 2023.

If you’re a VAT-registered business, you may have received a letter or email from HMRC, informing you that the new penalty system for Making Tax Digital (MTD) for VAT is now in place. 

Arriving at the beginning of this year, the system is described as simplified penalties for late VAT submissions and payments, with a goal of making these fairer and more proportionate for customers. 

And while penalties may sound like stick, rather than carrot, there is plenty of carrot when it comes to MTD compliance. Small businesses and their advisors can use MTD for VAT as a springboard to digital transformation, embracing this chance to adopt these tools to drive efficiency not just in the tax process, but throughout their businesses. 

Still, non-compliance can now result in real consequences. And with that in mind, we’ve broken down the penalties for failure to meet MTD requirements, so that you can ensure no nasty surprises come down the line.

What is the MTD penalty system?

The new points-based MTD penalty system is coming into play from January 2023. You will receive one point for every submission deadline missed, while penalties for not complying with MTD will depend on how frequently you submit.

Businesses that frequently miss deadlines will accrue points that will translate into fines if they reach a certain points threshold. There are other ways to be penalised, too – if you don’t have digital records or digital links in place, for example. 

If you submit annually, accruing two points will result in a penalty. If you make quarterly submissions, four points result in a penalty. This will also apply to MTD for Income tax Self Assessment (ITSA). For monthly submissions, taxpayers who collect five points will face a penalty.

If you reach your submission penalty threshold, you’ll incur a fine.

While you will be able to appeal points and penalties for MTD, you’ll need to use the reviews and appeals process, and have a reasonable excuse for missing a deadline.

When does the penalty system start?

The penalty system will roll out in January 2023 for MTD for VAT, replacing the existing penalty regime.

For non-VAT registered sole traders and landlords, penalties will apply when MTD for ITSA comes into effect in April 2024.

Do MTD penalty points expire?

MTD penalty points expire after two years, counted from the month after you received the point. 

For example, if you received the penalty point in April, the timeline would begin in May. Points do not expire when you’re at the penalty threshold. 

How much are the fines? 

You’ll be subject to a £200 fine if you reach the penalty threshold. Then, every following failure to make a payment on time will incur an additional fine.

How can I avoid penalties?

You’ll have a separate points total for every submission obligation you have. That means that if you submit a VAT return but also need to follow MTD rules for ITSA, requiring quarterly updates, you could accrue points for both, separately.

As for how you can comply, that part is simple: you follow the rules. Ensure you have compatible software and digital links in place, and that you submit what you need to on time.

It’s important to remember that, as the new points-based system comes into force, taxpayers who are consistently compliant but make the occasional error won’t be unduly penalised. Only those who are guilty of consistent non-compliance will face penalties and sanctions. 

With that in mind, you can forget the stick, and focus on the carrot of digital transformation and increased efficiency for your business.

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