HMRC has announced that penalties will be issued to those not completing VAT returns through Making Tax Digital (MTD) from 1 November 2022.

Anyone who files a VAT return via a non-electric submission will face penalties of up to £400.

The Association of Chartered Certified Accountants warned that the Government has proposed a points-based penalty scheme for MTD for VAT and self-assessment income tax (MTD for ITSA).

These changes will apply to VAT customers for accounting periods on or after 1 April 2022 and to income tax self-assessment customers with a turnover of £10,000 or above every year for accounting periods starting on or after April 2024.

MTD for VAT penalties

The penalty system will work as follows:

• A default will be recorded for any mistakes or late MTD filing.
• Taxpayers will enter a surcharge period for 12 months if they make another error or fail to submit a return. A percentage of the money owed will be charged as a fine.
• Each new fault will accrue further points.
• Points will be translated into a percentage charge, between 2% and 15%.

The amount businesses will be fined will depend on their annual turnover. A penalty will be issued if the return is filed incorrectly:

• £100 if turnover is below £100,000;
• £200 if turnover is between £100,000 and £5,600,000 inclusive;
• £300 if turnover is between £5,600,001 and £22,800,000 inclusive; and
• £400 if turnover is £22,800,001 or above.

Between £5 and £15 will be charged per day if businesses do not keep the records required of them digitally by using appropriate software.

The penalty will apply each day if businesses do not use digital links to transfer or exchange the required data between software when multiple pieces of software are used.

Up to 100% of the VAT owed can also be charged if a business fails to use ‘checking functions' in the software.

HMRC VAT portal to close

Now that HMRC is expecting everyone to have switched or soon to be switching to MTD, the VAT online account portal will be shut off from 1 November.

Businesses that annually file their VAT returns will still have access to the portal until 15 May 2023.

MTD- exempt businesses will also still have access to the online portal, while any businesses that have not yet signed up for MTD will be automatically migrated.

Once a business has signed up for MTD, it can no longer use its online account to file its VAT returns.

Caroline Miskin, senior technical manager of digital taxation at the Institute of Chartered Accountants of England and Wales (ICAEW), expressed her concerns:

"ICAEW is concerned that the closure of the online VAT return will bring to light a group of businesses that are unable to sign up to MTD VAT because of an issue with their VAT records or are waiting for a response to an application for digital exclusion exemption.

Miskin was also worried about the fact that not every business has signed up to MTD for VAT over the three years since its announcement.

"It is perhaps surprising that HMRC has been as patient as it has with businesses that should have signed up to MTD VAT more than three years ago," she said.

"Smaller businesses with turnover below the VAT threshold are being given much less time to comply."

Statistics from ICAEW show that 10% of VAT-registered businesses above the VAT threshold and 55% of businesses below still need to sign up for MTD.

Talk to us today about signing up for MTD for VAT.