MTD for VAT penalty waiver removed

The head of HMRC has written to accountancy firms informing them that the soft landing penalty waiver for Making Tax Digital for VAT will be removed from November.

HMRC chief executive Jim Harra said: ‘from Tuesday 1 November 2022, your clients will no longer be able to use their existing VAT online account to file their quarterly or monthly VAT returns.

‘Businesses that file annual VAT returns will still be able to use their VAT online account until 15 May 2023.

‘By law, VAT-registered businesses must now sign up to Making Tax Digital (MTD) and use MTD-compatible software to keep their VAT records and file their VAT returns.

‘If your clients do not sign up for MTD and file their VAT returns through MTD-compatible software, they may have to pay a penalty. The best way for businesses to avoid penalties is to start using MTD now.’

HMRC stressed that penalties will come into force from November for anyone who does not use the MTD for VAT digital reporting system.

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

ACCA warned that a new points-based penalties regime is proposed for VAT (including MTD) and income tax self assessments. The changes will apply to VAT customers for accounting periods beginning on or after 1 April 2022, and to ITSA customers with business or property income over £10,000 per year (who are required to submit digital quarterly updates through Making Tax Digital (MTD) for ITSA) for accounting periods beginning on or after 6 April 2024.

The new penalty regime works as follows:

  • a default is recorded for failure to observe the MTD rules or missing a filing;
  • taxpayers then enter a surcharge period, lasting 12 months, if they fault again. Surcharges are calculated as percentage penalties of the VAT due on the latest return;
  • an accumulated points system then applies for further faults if they happen within 12 months (the 12-month surcharge period is reset each time there is a new fault); and
  • the points translate into increased percentage surcharges for each accumulated default. They start at 2% and scale up to 15%.

Anyone who pays VAT must sign up for MTD for VAT and the first step is to choose MTD-compatible software to file VAT returns.

Clients who file quarterly or monthly VAT returns must be registered for MTD in order to file their VAT returns due after 1 November.

If clients are already exempt from filing VAT returns online or if they or their business are subject to an insolvency procedure, they are automatically exempt.

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