Making Tax Digital: What Penalties and Surcharges could my business face?
From April 2019, the 2.55 million VAT registered businesses with a turnover exceeding the £85,000 VAT threshold will be required to file VAT returns through Making Tax Digital compliant software and not via the current HMRC portal. They'll also be required to keep records digitally, and ultimately to make sure any digital records are directly linked with the software which submits the VAT returns.
But the introduction of Making Tax Digital (MTD) for VAT has prompted discussion about the risk of penalties where a problem with introducing new processes and systems results in late filing, late payment or other breach of the regulations. The MTD for VAT notice introduces a ‘soft landing’ on penalties for the first 12 months, but only in respect of digital links for any transfer or exchange of data between software programs, products or applications used as functional compatible software. Here we set out what HMRC could decide to impose if you get Making Tax Digital for VAT wrong.
The default surcharge will operate as currently until at least April 2021 when it is expected to be replaced by points based late submission penalties and late payment penalties. There will be no soft landing on default surcharge. Draft legislation for the new penalty regime was published in 2018 and the measure was expected to be included in Finance Act 2019 but has been deferred to a future Finance Bill.
No surcharge is payable if the VAT liability is paid by the due date and no surcharge is payable for the first default. Late submission of a return alone does not result in a default and HMRC’s view is that no soft landing is required because default surcharge can be avoided by paying the VAT due by the deadline and by the business not being charged for the first default.
General regulatory penalty
HMRC has the power to charge a penalty for failure to comply with certain regulatory requirements (VAT Act 1994 s69 (1)). The penalty rates for such a failure are:
- If there has been no previous failure to comply with the requirement within 2 years prior to the present failure - £5 per day.
- If there had been only one such occasion in that period - £10 per day.
- In any other case - £15 per day.
There is a minimum penalty of £50. The penalty rate is applied to the number of days a failure continues up to a maximum of 100 days.
These penalties are not automatic and are currently used infrequently. VAT Act 1994 s76(2) applies and the penalty can only be charged if HMRC has issued a written warning within the previous two years. These penalties will apply to the MTD for VAT regulations but HMRC is expected to operate a soft landing where the trader has made reasonable efforts to comply.
Record keeping penalty
HMRC has the power to charge a penalty for failure to keep the required VAT records (VAT Act 1994 s 69(2)). The maximum penalty is £500. This penalty cannot be charged in addition to the general regulatory penalty outlined above and the Tax Faculty’s understanding is that the general regulatory penalty is more likely to apply.
These penalties are not automatic and are used infrequently. The penalties will apply to MTD for VAT record keeping requirements but HMRC is expected to operate a soft landing where the trader has made reasonable efforts to comply.
Filing method penalty
HMRC currently has the power to charge a penalty of up to £400 for filing a VAT return other than electronically without the prior agreement of HMRC (VAT regulations 1995 reg. 25A). This power has been rarely used but will be extended to the obligation to file VAT returns using functional compatible software. HMRC is expected to operate a soft landing where the trader has made reasonable efforts to comply.
Other VAT penalties
There are other VAT-related penalties that are unaffected by MTD requirements but may need to be considered. These include:
- Inaccuracy penalties. HMRC has the power to charge tax geared penalties where there is an under-declaration of VAT due to an inaccuracy. The percentage penalty charged depends on HMRC’s view of the type of behaviour and whether the disclosure was unprompted or prompted
- failure to register for VAT
- failure to notify HMRC within 30 days of a VAT notice of assessment of tax that it is too low. These assessments are issued when a VAT return is not filed and the failure to notify penalty is 30% of the assessment
- penalties for late filing and/or late payment - only charged ‘where default surcharge has been ineffective in ensuring compliance’
There is a formal right of appeal against each of the different types of penalty. Possible grounds for appeal are
- reasonable excuse for late filing, payment or other failure to comply with the regulations
- in relation to inaccuracy penalties, that the trader took reasonable care to avoid errors and inaccuracies when filing their VAT return
These grounds for appeal will continue unchanged; if there is an issue connected with introducing new systems and processes this may be a relevant factor when appealing against a penalty.