HMRC publishes new guidance on Making Tax Digital compliance checks and penalties

The U.K. tax authority, Her Majesty’s Revenue and Customs (HMRC) has published new guidance on ‘Compliance checks: How to avoid penalties for Making Tax Digital for VAT’. It sets out the penalties that can be levied on taxpayers for not meeting the recent Making Tax Digital (MTD) requirements, and clarifies how the taxpayer’s use of their MTD compliant software may influence the level of penalties that may be applied in the case of VAT errors.

These penalties mean that a U.K. VAT registered business could face penalties of up to £1,600 per year if they do not file their U.K. VAT return to HMRC via API using functional compatible software. In addition, annual penalties for not having clear digital links in the VAT compliance process (e.g. continuing to copy and paste data within spreadsheets or re-typing data between systems and reports) could be up to £5,475. The same penalty figure will also apply for failing to keep the required VAT records digitally.

Carrying out checks on VAT data

HMRC has also suggested that it will be linking MTD to their general conditions for assessing and calculating penalties i.e. whether the reasons for an error has been a lack of reasonable care, or was deliberate. Under MTD, HMRC has in this new guidance stated that businesses must use the checking functions with the software they use. Therefore, where checks have not been run and errors have been identified, HMRC may charge penalties. Depending on the circumstances, this could be up to 100% of the VAT.

Soft-landing period has now ended

As a reminder, with effect on April 1, 2022, MTD was extended to all U.K. VAT registered businesses – regardless of their size, turnover, location, or whether they are registered for VAT purely on a voluntary basis. When MTD first came into force, HMRC implemented a ‘soft-landing’ period to allow businesses to get their digital links into place, and in some unique cases had formally provided a short-term extension. However, this updated guidance now confirms that MTD compliance will be considered when looking at the cause of VAT errors and the extent to which penalties are levied or mitigated. We understand many businesses are not yet fully compliant due to ERP upgrades, data quality issues, and recent M&A activity. However, based on this clarity on the penalty position, now is the time to revisit and implement a compliant process and VAT compliance solution including using embedded checks on the underlying transactional data.

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