HMRC has introduced the Making Tax Digital for VAT system which has now been opened up to more businesses. As of 1st January 2023, new penalty systems have also been introduced, which could lead to fines for businesses that make late payments.
MTD Late Submission Penalty
The MTD late submission penalty system is similar to other HMRC penalty systems in that it aims to encourage businesses to be on time when making their tax returns. Making tax digital VAT returns need to be completed every quarter throughout the tax year and HMRC regards these returns as a ‘regular submission obligation.’ This new submission obligation is based on a points system. However, if a business gets its calculations wrong or pays the incorrect amount, these issues can still attract fines under the usual penalty systems.
How do the Penalty Points for making tax digital for VAT work?
The penalty points system is analogous to the way in which motorists can accumulate points on their driving licenses for speeding. If a business keeps missing its submission deadlines, one point gets applied every time until a certain threshold is met and a fine of £200 is applied. It is worth noting that there will be different points applied for income tax and VAT and penalties will need to be paid for both elements if deadlines are missed.
If a business feels that a point has been applied incorrectly, it can appeal. However, the points also expire after a duration of two years if the business has not reached the maximum amount and a fine has not been applied. Once the £200 fine has been paid, HMRC then gives businesses a chance to accumulate a period of good behaviour wherein they must meet all their submission deadlines. For the submission of annual VAT returns, businesses must meet all deadlines for 24 months, quarterly submission is 12 months and for monthly submission of VAT, it must be 6 months wherein all MTD deadlines are met before their points can expire again.
Making tax digital for VAT Late Payment Penalty
HMRC has also introduced a penalty system for late payment of VAT returns which runs alongside the penalty points for late submission system. This is also based on a points-style system which gives businesses a chance to pay before the maximum penalties are imposed. If a business is late to pay by up to 15 days, there is no penalty to pay. If 30 days have passed, a 2% charge will be applied. After 31 days, a business has to pay 2% of the amount due on day 15 and 2% of the amount due on day 30. After day 31, the penalties become more prohibitive, with a 4% charge of the outstanding amount applied every day until payment is made. In addition, as with all HMRC systems, there is also a 2.5% interest rate to be applied on all late payments.
In conclusion, businesses need to be prepared for these changes and be ready to submit their making tax digital VAT returns on time, every time. We would advise that your business remains MTD compliant to avoid any unnecessary penalty points or fines.
