MTD VAT Penalties

MTD VAT Penalties

What are the potential MTD VAT penalties? How does the HMRC soft landing affect businesses adopting MTD.

MTD VAT penalties and the soft landing

Changing from a manual system to a digital system was always going to be problematic for some businesses. As a result, HMRC announced a soft landing period of 12 months.

The soft landing announced by HMRC only applies to the requirement to maintain ‘digital links’.

Digital links relate to the transfer or exchange of data between software. For example you can’t copy and paste data from one spreadsheet to another. This is not allowed under MTD but can be continued under the soft landing time frame.

Default surcharges

Default surcharges will still apply under MTD. This VAT penalty is issued when a VAT liability is paid late.

No surcharge is issued on the first default of VAT payment. Surcharges aren’t issued if the VAT return is filed late.

Businesses which make the VAT payment on time receive no default surcharges. For this reason, HMRC did not see the need to allow a further soft landing in relation to surcharges.

For example if the Direct Debit falls to go through for the first MTD VAT return. (This issue has been reported). There would be no default surcharge raised. Businesses should make the correcting payment immediately and ensure the Direct Debit is in place for future filings.

Currently there are plans to reform the surcharges. As a result it is expected that a points based penalty will be applied. It will relate to both late payments and late submissions. This is expected to be introduced from April 2021 at the earliest.

MTD VAT penalties for filing incorrectly

HMRC can charge a penalty of up to £400 for filing a return which is not an electronic submission.

This penalty has been extended to include the requirement to file under MTD using compatible software.

In the past this penalty has been rarely used. It is expected that HMRC will be lenient, so long as the business can show they made reasonable efforts to comply.

Further penalties

There are many other penalties relating to VAT. These include deliberate inaccuracy, failure to register, and consistent for late filing and/or late payments.

All of these penalties will continue as part of the rules applicable to MTD VAT penalties.

The only difference is that with MTD, HMRC have stated that leniency will apply. But only if the business can prove that it has made reasonable efforts to comply with MTD.

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