If your business is VAT registered and has a turnover of under £85,000, your next VAT return is likely to be the first you have had to submit under Making Tax Digital (MTD) for VAT rules, which now apply to all VAT-registered businesses. As with many HMRC initiatives, if you fail to follow the rules of MTD for VAT you could incur a penalty. With this in mind, we’ve provided a roundup of HMRC’s penalty system for MTD for VAT, along with a reminder of how to follow the rules.
A quick recap of MTD for VAT
MTD for VAT is part of Making Tax Digital, the government’s initiative to implement a fully digital tax system in the UK. For VAT quarters beginning on or after 1st April 2022, all VAT-registered businesses are required to use MTD-compatible software, like FreeAgent, to:
- store business records digitally
- file VAT returns to HMRC
HMRC’s penalty system for MTD for VAT
Since 31st May 2022, any VAT-registered business that fails to follow MTD for VAT rules has been subject to penalties from HMRC. These include penalties of:
- up to £400 for every VAT return not submitted through ‘functional compatible software’
- between £5 and £15 per day for not keeping the required records digitally in the software
- up to 100% of the VAT you owe as a result of making a mistake by failing to use the ‘checking functions’ in the software. In this scenario, you would also need to pay the VAT you owe.
From 1st January 2023, an additional penalty system will be introduced to address the late submission of VAT returns and late payment of VAT. We explain this framework in further detail in our comprehensive guide to MTD for VAT penalties.
How to follow MTD for VAT rules
If your business is VAT registered and you haven’t done so already, you need to complete the following steps at least seven days before the VAT return for your first VAT quarter starting on or after 1st April 2022 is due. For many businesses, the due date of this VAT return will be 7th August 2022.
- Sign up for MTD on HMRC's website. You'll receive an email within 72 hours to confirm that you can submit VAT returns using your chosen software.
- Sign up to MTD-compatible software, like FreeAgent. If you have a business current account with NatWest, Royal Bank of Scotland or Ulster Bank NI, or a business account with Mettle, you can get FreeAgent for free, for as long as you retain your account.
- Connect your MTD-compatible software with HMRC. Find out how to do this in FreeAgent.
- Prepare your accounts in the software. Find out how to do this in FreeAgent.
- Use the software to make your next VAT return submission - and all subsequent submissions - to HMRC. FreeAgent generates your VAT return automatically and uses the data in your account to populate it. You can then file your completed VAT return directly to HMRC in just a few clicks.
Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.