In January 2023, HMRC introduced a new penalty system for Making Tax Digital (MTD) for VAT. This system is designed to make penalties fairer and more proportionate for customers, and to encourage businesses to comply with MTD requirements.
What is the MTD penalty system?
The new MTD penalty system is points-based. You will receive one point for every submission deadline missed. If you reach a certain points threshold, you will be fined. The points threshold depends on how frequently you submit your VAT returns:
Annual submissions: 2 points
Quarterly submissions: 4 points
Monthly submissions: 5 points
There are other ways to be penalised under the new MTD penalty system, such as for not having digital records or digital links in place.
When does the penalty system start?
The penalty system is already in place for MTD for VAT. It will also apply to MTD for Income Tax Self Assessment (ITSA) when it comes into effect in April 2024.
Do MTD penalty points expire?
MTD penalty points expire after two years, counted from the month after you received the point.
How much are the fines?
If you reach the penalty threshold, you will be fined £200. For every subsequent failure to make a payment on time, you will be fined an additional £200.
How can I avoid penalties?
The best way to avoid penalties is to comply with MTD requirements. This means:
- Using compatible software
- Having digital links in place
- Submitting your VAT returns on time
The new MTD penalty system is designed to be fairer and more proportionate for customers. However, it is important to be aware of the penalties that can be applied for non-compliance. By following the rules, you can avoid penalties and ensure that your business is compliant with MTD requirements.
Looking beyond the stick to the carrot
In addition to avoiding penalties, MTD compliance can also offer businesses a number of benefits, such as:
- Improved efficiency
- Reduced risk of errors
- Better visibility of financial performance
- A springboard to digital transformation
By embracing the digital tools offered by MTD, businesses can drive efficiency not just in the tax process, but throughout their businesses.