MTD for VAT: avoid penalties as soft-landing period ends

The soft-landing period for Making Tax Digital for VAT has ended for VAT periods starting on or after 1 April 2021

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From 1 April 2021, your systems must use digital links for any transfer or exchange of data between software programs, products or applications used as functional compatible software, as stipulated in Schedule 11 paragraph 6 and 6A of VAT Act 1994.

During the soft-landing period, it was acceptable to copy and paste data for your VAT return. But now it will no longer be considered acceptable by HMRC to copy and paste data for your VAT return.

HMRC can charge a penalty of up to £400 for filing a return which is not an electronic submission. This penalty has been extended to include the requirement to file under MTD using compatible software.

In relation to returns for prescribed periods which end on or after 31 March 2021, unless there is a reasonable excuse, a person who fails to make a specified return using either MTD or the electronic return system is liable to the following penalty (Value Added Tax Regulations 1995, reg. 25A(15)–(17)):

Annual VAT exclusive turnover

Penalty

£22,800,001 and above

£400

£5,600,001 to £22,800,000

£300

£100,001 to £5,600,000

£200

£100,000 and under

£100


As announced by HM Treasury in March 2021, a new points-based penalties regime is proposed for VAT (including MTD) and income tax self assessments. The changes will apply to VAT customers for accounting periods beginning on or after 1 April 2022, to ITSA customers with business or property income over £10,000 per year (who are required to submit digital quarterly updates through Making Tax Digital (MTD) for ITSA) for accounting periods beginning on or after 6 April 2023 and to all other ITSA taxpayers for accounting periods beginning on or after 6 April 2024.

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 they fault again. Surcharges are calculated as percentage penalties of the VAT due on the latest return.
  • an accumulated points system then applies for further faults if they happen within 12 months (the 12 month surcharge period is reset each time there is a new fault)
  • the points translate into increased percentage surcharges for each accumulated default. They start at 2% and scale up to 15%.

HMRC guidance for MTDfVAT can be found within VAT notice 700/22.

Useful resources

ACCA MTD for VAT: FAQs

ACCA guide to MTD: how to file a VAT return