Preparing for Future MTD Penalties
To avoid complications, it’s advisable to transition to an MTD-compliant accountant or software as soon as possible. Waiting to make this change could leave you vulnerable when HMRC starts enforcing stricter regulations, potentially leading to hefty penalties for any errors.
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What Happens If I Get It Wrong?
Understanding the potential penalties for non-compliance with Making Tax Digital (MTD) is crucial. Here’s what you need to know:
New Penalty System
HMRC plans to introduce a new penalty system tailored for MTD’s impact on VAT payments and record-keeping. This means that as MTD expands to include other filings, there will likely be a review of penalties related to late or incorrect submissions.
Current Penalties
Existing penalties for late VAT payments will still apply. If you default on a VAT payment, you may receive a Surcharge Liability Notice, leading to surcharges of 2%, 5%, 10%, or more, depending on the duration of the default. These penalties can accumulate quickly.
“Light Touch” Approach
Initially, HMRC adopted a lenient approach, promising not to impose penalties in the first year of MTD implementation if businesses were making genuine efforts to comply. Despite this reprieve, it’s essential to establish compliant practices to avoid future penalties.
What Are the Penalties for MTD Non-Compliance ?
The Chancellor of the Exchequer outlined a light-touch approach to penalties in the first year of Making Tax Digital (MTD) implementation. Initially, businesses making genuine efforts to comply would not face filing or record-keeping penalties.
The soft landing period for MTD for VAT was set to conclude on 31st March 2020. However, due to the impact of the Coronavirus, this period has been extended and will now end for VAT periods starting on or after 1st April 2021.
While there may be some leniency initially, it’s crucial to take MTD compliance seriously. Failing to pay your VAT bill or not making a sincere effort to adhere to MTD rules—including maintaining digital records—can result in penalties.
HMRC is actively monitoring compliance. If you face a VAT inspection, don’t worry; they focus on your efforts to understand and implement the rules, rather than solely on compliance success. HMRC is generally understanding towards businesses making genuine attempts to comply and will provide helpful guidance to those who may have fallen short. If you’ve put in the effort and been honest, you should have nothing to fear.
What Is the ‘Soft-Landing Period’?
Digital Links Requirement
MTD mandates that businesses must have a digital link between their accounting systems and HMRC. This refers to the specific technical way data is transferred, which must go beyond simply using the internet. It cannot involve manually entering data into the HMRC website or copying and pasting figures.
End of the Soft-Landing Period
The current soft-landing period for digital links is set to end for VAT accounting periods starting on or after 1 April 2021. Businesses that benefited from the deferred start date (for VAT periods beginning on 1 October 2019) have an extended soft-landing period, lasting an additional six months.
Automation Focus
HMRC’s goal is to ensure that the flow of accounting data is fully digital and automated. This means that approved accounting software—whether owned by the business or managed by an accountant—must facilitate this process, allowing for seamless data transmission without manual intervention.
Are You Certain Your Software Is Compliant?
HMRC has clarified that manually copying and pasting data does not qualify as an automated process and, therefore, fails to meet the criteria for a digital link. The focus is on ensuring a seamless and automated flow of data.
To ensure compliance with MTD regulations, review your accounting software and processes. Are you confident that you’re adhering to the required guidelines? If you’re unsure, consider consulting with a qualified accountant or switching to compliant software.
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