Making Tax Digital for VAT - penalties from April 2021

During the first year of launch of the Making Tax Digital for VAT initiative - then extended a further year due to the COVID-19 crisis, HMRC suspended the regular accumulating penalty regime for missed returns. During this 'soft-landing' period, if businesses could demonstrate they made best efforts to comply with the new MTD filing obligations, they would not be fined. Similarly, the requirement to comply with the new digital record keeping and complete digital journey rules were waived by HMRC.

However, the regular accumulated penalty payments for late or underpaid VAT liabilities remained in place.

From 1 April 2021, the regular VAT penalty regime applied on late filings, plus on failure to keep digital records or maintain a complete digital journey (no manual data manipulation, adjustments or 'copy-and-paste' in spreadsheets).

The new regime for MTD for VAT penalties from 1 April 2021 is outlined below:

New penalties for MTD for VAT

The UK has introduced a penalty system from 1 April 2021 for MTD for VAT. This will apply to the first complete VAT return on or after this date. The regime is as follows:

  • A default is recorded for failure to observe the MTD rules or missing a filing.
  • Taxpayers then enter a surcharge period, lasting 12 months, if you fault again. Surcharges are % penalties of the VAT due on the latest return.
  • An accumulated points system then applies for further faults if they happen within twelve months. (The twelve month surcharge period is reset each time there is a new fault.)
  • The points translate into increases % surcharges for each accumulated default. They start at 2%, and scale up to 15%.

Fines and Interest charges for late VAT MTD payments

In addition to penalties for late submissions, and failing to observe the digital recordkeeping and digital journey rules, there will also be fines and interest charges. Fines may be 100% of the VAT due or over-claimed if the returns contain careless or deliberate inaccuracies. The fine may be 30% if taxpayers do not inform HMRC that a raised assessment is too low.

Interest on late-paid VAT is also due. This is charged at 3% of the VAT due.

Need help with your UK VAT compliance?

Researching UK VAT legislation is the first step to understanding your VAT compliance needs. Avalara has a range of solutions that can help your business depending on where and how you trade.