This weblog was first printed in April 2022 and up to date in January 2023.

When you’re a VAT-registered enterprise, you could have obtained a letter or e mail from HMRC, informing you that the brand new penalty system for Making Tax Digital (MTD) for VAT is now in place. 

Arriving at first of this yr, the system is described as simplified penalties for late VAT submissions and funds, with a objective of constructing these fairer and extra proportionate for patrons. 

And whereas penalties could sound like stick, fairly than carrot, there’s loads of carrot in relation to MTD compliance. Small companies and their advisors can use MTD for VAT as a springboard to digital transformation, embracing this opportunity to undertake these instruments to drive effectivity not simply within the tax course of, however all through their companies. 

Nonetheless, non-compliance can now lead to actual penalties. And with that in thoughts, we’ve damaged down the penalties for failure to satisfy MTD necessities, to be able to guarantee no nasty surprises come down the road.

What’s the MTD penalty system?

The brand new points-based MTD penalty system is coming into play from January 2023. You’ll obtain one level for each submission deadline missed, whereas penalties for not complying with MTD will depend upon how regularly you submit.

Companies that regularly miss deadlines will accrue factors that may translate into fines in the event that they attain a sure factors threshold. There are different methods to be penalised, too – in case you don’t have digital information or digital hyperlinks in place, for instance. 

When you submit yearly, accruing two factors will lead to a penalty. When you make quarterly submissions, 4 factors lead to a penalty. This may even apply to MTD for Revenue tax Self Evaluation (ITSA). For month-to-month submissions, taxpayers who acquire 5 factors will face a penalty.

When you attain your submission penalty threshold, you’ll incur a effective.

Whereas it is possible for you to to attraction factors and penalties for MTD, you’ll want to make use of the evaluations and appeals course of, and have an inexpensive excuse for lacking a deadline.

When does the penalty system begin?

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

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

Do MTD penalty factors expire?

MTD penalty factors expire after two years, counted from the month after you obtained the purpose. 

For instance, in case you obtained the penalty level in April, the timeline would start in Could. Factors don’t expire once you’re on the penalty threshold. 

How a lot are the fines? 

You’ll be topic to a £200 effective in case you attain the penalty threshold. Then, each following failure to make a fee on time will incur an extra effective.

How can I keep away from penalties?

You’ll have a separate factors whole for each submission obligation you will have. That implies that in case you submit a VAT return but additionally must comply with MTD guidelines for ITSA, requiring quarterly updates, you could possibly accrue factors for each, individually.

As for how one can comply, that half is straightforward: you comply with the principles. Guarantee you will have appropriate software program and digital hyperlinks in place, and that you just submit what you could on time.

It’s necessary to keep in mind that, as the brand new points-based system comes into pressure, taxpayers who’re constantly compliant however make the occasional error received’t be unduly penalised. Solely those that are responsible of constant non-compliance will face penalties and sanctions. 

With that in thoughts, you may neglect the stick, and give attention to the carrot of digital transformation and elevated effectivity for your online business.