Making Tax Digital Penalties
What happens if I get it wrong?
This is always the bit that people want to know about: ‘How badly will it hurt me if I get it wrong?’
HMRC will be introducing a new penalty system over the next few years – one that is more suited to Making Tax Digital’s impact on VAT payments and record keeping. Likewise, when MTD extends to other filings there will doubtless be a review of the penalties applied for late or non-submission, as well as non-compliance
What we do know is that the current penalties for late payment will still apply, even if the filing deadline isn’t so strictly monitored in the first stages of implementation.
Current rules state that a business defaulting on a VAT payment can be issued a Surcharge Liability Notice. That means that you could end up paying surcharges of 2, 5, 10% or more of the total of the defaulted amount, depending on how long the business remains in default or how many times you miss a VAT payment. Those penalties can add up quickly if you bury your head in the sand!
HMRC also has the power to issue additional penalties at its discretion for not keeping correct records, or when VAT Returns are filed incorrectly. HMRC can be especially strict on if it feels it has been deliberately misled by a business.
What are the penalties?
Regarding a future penalty system for Making Tax Digital, the Chancellor of the Exchequer said the following in his Spring Statement 2019:
“The government can confirm a light touch approach to penalties in the first year of implementation [of MTD]. Where businesses are doing their best to comply, no filing or record keeping penalties will be issued.”
The soft landing period for Making Tax Digital for VAT was due to end on 31st March 2020, marking the end of HMRC’s “light touch” towards non-compliance with the new rules. However, with Coronavirus having a significant impact on businesses throughout the UK, the soft landing period will now extend and only end from VAT periods starting on or after 1st April 2021.
So whilst the surcharge penalty system looks complicated and there might be a slight reprieve in the first stage on certain aspects of MTD filings, this doesn’t give you carte blanche to ignore the requirements of MTD, or to make deliberate or careless errors. It’s important to get into the correct practices as soon as possible so that compliance becomes second nature to you and your business. I cannot stress strongly enough that ultimately, you can be penalised for failing to either pay your VAT bill or for not trying hard enough to follow the new MTD rules – including digital links and keeping digital records.
As is to be expected, HMRC are checking up on businesses under the new rules. If you are unlucky enough to end up having a VAT inspection, don’t panic! They are mainly interested in looking at how hard you have tried to get to grips with the legislation, even if you haven’t done so successfully.
Despite its reputation, HMRC is very fair to businesses that are trying to comply and will offer useful advice and help to those that have, despite their best efforts, fallen short. If you’ve tried your best and been honest, you won’t have anything to worry about.
What is the ‘soft-landing period’?
HMRC is allowing a “soft-landing” period, which is different to the light touch for penalties outlined in the 2019 Spring Statement. The soft-landing period refers to a slight relaxing of the technical rules on digital links. Digital links are a central part of how the legislation says MTD for VAT must perform within a business and refers to the specific technical way that data gets transferred to HMRC.
This soft-landing period will end though – or may have already ended depending on when you’re reading this. The current 12 month soft landing period for digital links will end for VAT accounting periods starting on or after the 1 April 2021. Businesses that benefited from the deferred start date for MTD (VAT periods beginning 1 October 2019) have a further six months of the soft landing period until their first VAT period beginning after 1 October 2021. So some of you may still have a little time left.
I can hear you crying out at your screen:
“Hang on, did I read that correctly? There are technical rules on exactly how the data gets transmitted? I thought it just had to be via the internet and software!”
That’s right. Not only does Making Tax digital stipulate that businesses must keep records digitally, but there are rules about how that digital data gets transmitted to HMRC. It can be a bit baffling!
In its simplest form, the rule says there must be some form of digital link between your business and HMRC. Usually, that involves an approved piece of software, as we mentioned earlier. That software can be owned by either the business or its accountant. Don’t worry, if your accountant manages the process for you, their digital link counts as yours. You don’t have to have the same piece of software as well.
It simply means no more punching your figures directly into the HMRC website.
It also means no copying and pasting figures onto the site either. That makes it trickier if you were planning to use a spreadsheet to keep your digital records. HMRC says that copying and pasting is not a true digital link, even if all records are kept digitally.
HMRC ultimately wants the flow of accounting data to be entirely digital, and therefore automated, which forms its definition of digital linking.
Are you sure your software is compliant?
According to HMRC, if a user manually copies and pastes data then it is not an automated process, so isn’t classified as a digital link. As far as HMRC is concerned, the future is all about data flow via automation.
Another tricky complication is that the rule applies even when copying and pasting data from within the same software. You cannot copy a figure from one box in your accounting software and pop it into a box on the VAT Return to file. Once the soft-landing period ends, it should be automatically pulled from somewhere else.
During the soft-landing period, HMRC has accepted ‘copy and paste of data’ as a form of digital link – mainly because so many businesses have struggled to adopt a compliant system, but also to make sure that the system really works before they lock it down. But HMRC has warned in the strictest terms that the soft-landing period is only to allow businesses time to update their old systems – so you shouldn’t rest on your laurels, especially as the soft landing period ends on 31st March 2021 for many businesses!
I have a sneaking suspicion that many businesses have been using the copy and paste approach without realising that, at the end of the soft-landing period, they might be opening themselves up to be penalised. They may not have even realised that the solution they adopted in the first instance might be using the copy and paste option. So, are you sure you’re compliant?
You guessed it - there are likely to be new penalties in the near future
It’s likely that after the soft landing period and light touch approach ends, HMRC will update the penalties to be more in line with penalties for late filing and payment of income and corporation Tax – based on a penalty point system. That could look something like a penalty point for a missed return leading to a fine after four accumulated points for missed returns. And penalty points may last for two years before they expire.
As we have said before, it is much better to make the shift to an accountant or software that is MTD compliant sooner rather than later. Putting off switching, for whatever reason, could leave you with little time to manoeuvre when HMRC get stricter. It could end up leading to hefty penalties should you get it wrong.
Switch to an MTD-compliant solution now and let someone else worry about the digital flow of your accounting data!