MTD: Risks of Non-Compliance

The majority of UK businesses are required to be MTD-compliant by 1 April 2019. Here we explain a bit more about the penalties you may face if you are not compliant in time, and if you then miss payments.

What does it mean to be MTD-compliant?

Being MTD-compliant means keeping digital accounting records and submitting your VAT returns, tax returns and corporation tax via MTD-compatible software.

The deadline that’s approaching fast applies to any business over the VAT threshold (£85,000 pa), which accounts for most businesses. The deadline is the 1st April 2019 and it applies specifically to VAT submissions and payments. Check to see if you need to take action here.

But don’t get too comfortable if your business is under the VAT threshold. We’re currently expecting all other businesses to require an MTD-compliant solution by April 2020 for VAT payments. This is in addition to income tax and corporation tax which have their MTD compliance deadline pencilled in for April 2020 also. This deadline is yet to be set in stone by the Government and we expect an update on this in the Spring Statement or Autumn Budget 2019.

What happens if I’m not compliant in time?

From 1 April 2019, you will have to submit your VAT reports and payments digitally, using HMRC-approved accounting software. The current HMRC online portal will no longer exist, and if you’re not compliant you will find that you simply cannot complete your VAT reports, meaning that you will be subject to late filing penalties.

Similarly, if you miss the April 2020 (tbc) deadlines you’ll not be able to submit your tax returns, and will automatically receive fines for late payments. So really, non-compliance is not an option.

What if I’m already using a software but it’s not compliant?

Many businesses are using older versions of bookkeeping software which cannot connect to HMRC, if you’re still using one of these older version you’ll need to update your software.

In some cases your business data may be able to be imported into a newer MTD-compliant version, or can be transferred into a different software completely. Ask your accountant if this is an option you’d like to explore.

What are the penalties for missing VAT and tax return deadlines?

The penalty system for the late filing and late payment of VAT and tax is changing.

Rather than receiving an automatic £100 penalty when a tax deadline is missed, and the current % based surcharge for missing a VAT deadline, a points-based system will be introduced. From April 2020 (tbc) f you collect a certain number of points within a specific time period, you will receive a penalty charge.

The number of points that trigger a penalty charge will depend on the frequency of your VAT return submissions. The current proposal for these penalty thresholds is: 2 points for annual submissions, 4 points for quarterly submissions and 5 points for monthly submissions. The frequency requirements will be different for different businesses – talk to your accountant if you’re unsure which applies to you.

Points will generally have a lifetime of 24 months, before being cleared from your record. If you are given points, but not enough to trigger a penalty charge, these points will also automatically expire after 24 months.

The new fixed penalty amount hasn’t been announced yet, but it looks set to be higher than the current penalty:

“The fixed penalty is likely to be set at a higher rate than current penalties to reflect this, but unlike the current penalty regime there will be no escalation to daily or tax-geared penalties.” HMRC

This new system is due to come into effect on 1 April 2020, with what the government has called a ‘soft landing’ period for late submissions during the first year of MTD.

The current penalties will continue through to April 2020, however please remember that if you don’t start using an MTD-compliant solution you will definitely receive % based VAT penalties from April 2019.

What do I do next?

Contact your accountant to discuss which accounting software will best suit your business. If you’re not sure where to start, or if you don’t have an accountant, take a look at our latest advice on choosing software for MTD.

And remember that MTD has been set up to make it easier for businesses to track VAT and tax, and to make payments online on time. Using digital accounting software will mean that you’re less likely to miss a deadline risking penalties, or be unpleasantly surprised by the amount you need to pay. Being MTD-compliant could help save your business time and money!