MTD for VAT: what are the HMRC penalties for failing to comply?

With many VAT-registered businesses currently preparing to file their first VAT return under Making Tax Digital (MTD), you might be wondering what the penalties are for failing to comply with the rules.

Here, award-winning accounting software provider, FreeAgent, explains HMRC’s penalty system for non-compliance with MTD for VAT.

The MTD VAT position for limited company directors…

If you’re either self-employed or the director of a Personal Services Company (PSC) and your business is VAT-registered, MTD for VAT rules require you to use MTD-compatible software, like FreeAgent, to keep digital business records and file VAT returns to HMRC.

If your business has a turnover of under £85,000, you are required to follow these rules for your first VAT quarter dated on or after April 1st 2022. As with many of its other initiatives, HMRC will issue penalties to taxpayers who fail to comply with the rules -- albeit not until January 2023.

How much HMRC will fine you if you get MTD for VAT purposes wrong

At the time of writing, the penalties from HMRC for MTD VAT non-compliance are:

• 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 owed as a result of making a mistake by failing to use the ‘checking functions’ in the software (in this scenario, the owed VAT would also have to be paid)
• between £5 and £15 for every day that digital links are not used to transfer or exchange the required data between software, when multiple pieces of software are used.

Steps to take to not get stung

To follow the rules and avoid incurring these HMRC penalties for MTD VAT non-compliance, you will of course need to sign up for MTD on HMRC's website. And then you will need to sign up to MTD-compatible software, like FreeAgent before your first VAT return under MTD is due. To learn more, check out FreeAgent’s dedicated MTD hub.