HMRC implemented Making Tax Digital (MTD) for VAT three years ago and introduced a soft-landing period for businesses to become fully compliant with the requirements.

It is now a legal requirement for all VAT-registered businesses to keep certain records digitally and file VAT returns using compatible software.

HMRC has now published a new compliance checks factsheet (CC/FS69) CHECK IF LINK WORKS that provides guidance on the penalties that apply to MTD VAT. This includes penalties for filing incorrectly (without MTD software), failing to keep digital records, and not using digital links to transfer data.

We have outlined these penalties below.

Filling incorrectly

All VAT-registered businesses should now file VAT returns using functional compatible software. If returns are filed without using functional compatible software, HMRC may charge a penalty of up to £400 per incorrectly-filed return.

Filing method penalties are part of Regulation 25A of VAT regulations (SI 1995/2518) and can be applied to businesses that fail to sign up to MTD and continue to file their VAT returns without the use of MTD-compliant compatible functional software.

Functional compatible software is software that will:

  • Record and store digital financial records
  • Provide the VAT return information to HMRC through a digital link
  • Receive information from HMRC.

The penalty applies per VAT return filed in an incorrect way and is scaled according to the annual VAT exclusive turnover of the business.

Annual turnover Penalty
£22,800,001 and above £400
£5,600,001 to £22,800,000 £300
£100,001 to £5,600,00 £200
£100,000 and under
 £100

It seems that HMRC will only begin charging the above penalties once all VAT records have been transferred from its old VAT database to the new MTD database later this year.

Digital records and links

Businesses must keep some records digitally within the functional compatible software and all transfers of data between programs, apps or products must be done using digital links which plays a large part of MTD. The newly published factsheet suggests that HMRC may charge a penalty of between £5-15 every day for which records are not kept digitally. The penalty for failing to keep digital records will increase with each offence as follows:

  • £5 for first breach
  • £10 for second breach
  • £15 for third and more breaches

HMRC considers the failing of keeping digital records and the maintaining of digital links to be two separate breaches and, as such, if a taxpayer fails to do both of these then a penalty of £10 per day will be raised.

It also seems that HMRC is still planning to introduce changes to its overall VAT penalty regime from January 2023. The penalties introduced above will specifically relate to MTD compliance.

If you have any concerns on your MTD filing position, digital records or digital links or more information on the above penalties, please contact our VAT team at VAT@ct.me.