HMRC Requires Businesses to Use Making Tax Digital (MTD) Software for VAT Returns
15/05/2023

HMRC Requires Businesses to Use Making Tax Digital (MTD) Software for VAT Returns

HMRC has recently informed companies that they can no longer utilize existing VAT online accounts to file their annual VAT returns. This change applies to all VAT-registered businesses, and the transition period will end in the next three weeks. Instead, businesses will need to adopt Making Tax Digital (MTD) compatible software for managing their VAT records and filing VAT returns.

Jim Harra, HMRC's chief executive, emphasizes the objective of simplifying tax affairs for businesses. Unless a client is exempt or awaiting an exemption response, all remaining businesses will be automatically enrolled in MTD. Taking prompt action is crucial to avoid potential penalties.

To begin using compatible software, businesses must invest in MTD-compatible solutions. HMRC provides the following steps to be followed before the next return is due:

Step 1: Choose MTD-compatible software suitable for your business. A list of software options, including free choices, can be found on the official government website (gov.uk).

Step 2: Check the software permissions to ensure it works seamlessly with MTD. More information can be found under "manage permissions for tax software."

Step 3: Keep digital records of your current and future VAT returns. HMRC provides guidance on the types of records that must be maintained digitally.

Step 4: File your future VAT returns on time using MTD-compatible software. Detailed instructions on how to submit your VAT returns are available.

Exemption from using MTD-compatible software is possible for clients who are already exempt from online VAT return filing or are subject to an insolvency procedure. Limited exemptions are also available for specific cases where using computers, software, or the internet is not reasonable or practical. HMRC evaluates exemption applications on a case-by-case basis.

A new points-based penalty regime has been introduced by HMRC for VAT returns submitted late and for late VAT payments, starting from 1 January 2023. This system replaces the previous VAT default surcharge. Late submission penalties start at zero points for all taxpayers, including those on a default surcharge. However, any taxpayer currently on a default surcharge remains liable for any associated charges already received.

Late submission penalties accrue as penalty points until reaching the threshold, at which point a £200 penalty is imposed. An additional £200 penalty applies for each subsequent late submission while at the threshold, which varies based on accounting periods (monthly, quarterly, or annual).

Late payment penalties are also implemented. If a VAT payment exceeds 15 days past the due date, the first late payment penalty is imposed. Further, if the VAT payment is over 30 days overdue, the first late payment penalty increases, and a second late payment penalty comes into effect.

To help businesses adjust to the changes, HMRC will not levy a first late payment penalty on VAT payments due on or before 31 December 2023 if businesses either pay in full or agree on a payment plan within 30 days of the payment due date.