Non-compliance with Making Tax Digital (MTD) – What are the penalties?

Making Tax Digital, which was introduced to help customers to get their tax right has now been compulsory for all VAT-registered businesses since April 2022.

We won’t re-visit the ins and outs of MTD for VAT here, but if you need a reminder please visit our previous article  Making Tax Digital (MTD) for VAT.

In this article we want to make you aware that businesses who are not complying with the MTD for VAT requirements can be charged penalties.

These penalties are completely separate from late filing or payment penalties and surcharges. They relate specifically to non-compliance with Making Tax Digital for VAT.

HMRC have published detailed guidance on the subject which can be found here but here is a summary of the key points:

• You must file your VAT return using functional compatible software

Filing through functional compatible software was the very first phase of MTD for VAT. If you file your returns, but do not use functional compatible software (i.e. you type the figures from boxes 1-9 into the Government Gateway), you’re not compliant, and HMRC can charge you a penalty of up to £400 for every return you file.

• You must keep records digitally

You must keep certain records digitally within your functional compatible software.  It’s not necessary to keep all of your VAT records digitally, but failing to keep the required information ‘digitally’ could land you with a penalty of between £5 to £15 for each day on which you don’t meet this requirement.

• You must use digital links to transfer or exchange data

If you transfer or exchange data within and between software programs, apps or products (that make up functional compatible software), and the information forms part of your electronic account, you must do this using digital links.  So if you use a separate CRM system for certain sales, and manually input this data into your functional compatible software, you will  be non-compliant.

Use of ‘cut and paste’ or ‘copy and paste’ to select and move information is not a digital link!

If you don’t use digital links to transfer data between pieces of software, HMRC may charge you a penalty of between £5 to £15 for every day on which you fail to meet this requirement.

• You must use the checking functions within your software

You must use the checking functions within your software to make sure your returns are correct before you file them. If you can, you should also download a copy of the return before you file it.

If you file a return that contains errors, you will have to pay back any VAT that you owe.

HMRC may also charge you a penalty of up to a hefty 100% of the VAT you owe!

Common Areas of Non-Compliance

Many businesses that use functional compatible software (i.e. Sage or Xero) will assume that they are compliant with MTD for VAT.  But it’s easy to fall foul of the rules.  If you are doing any of the following, you may not be compliant:

• Manually altering VAT return figures (boxes 1 – 9) before submitting to HMRC
• Routinely making manual adjustments to amend underlying data
• Making multiple journals for the same ‘adjustment’ rather than amalgamating and creating one entry per return
• Using ‘cut and paste’ or keying in data, rather than linking to the original source
• Not digitally linking different software packages

Unsure if you’re compliant? 

Sign up for an MTD for VAT health check, which includes:

• A step by step walk through of how purchase and sales get onto the VAT return (including online sales, invoices, petty cash, expenses, etc)
• Review of the ‘out of software’ adjustments made to the data (partial exemption, non-business calculations, etc)
• Identifying areas of risk to the organisation (for example where digital links are not currently maintained)
• Offering straight-forward ways to get compliant with the current rules (where possible)
• Bullet point report of our findings, for your records

Undertaking a review of this type helps you to understand whether you are complying with the rules, and identifies areas where you will need to make changes to avoid penalties.  Further, it will help demonstrate to HMRC that you are taking reasonable care in your VAT affairs should HMRC challenge your compliance with these complex rules.

Need our support?

As can be seen from the above, the penalties for non-compliance with MTD are not insignificant.

If you need our help with any aspect of MTD for VAT please get in touch with Gemma McCaldon-Gower at Gemma.McCaldon-Gower@cowgills.co.uk