HMRC’s MTD for VAT penalties are outdated and unfair, says ATT

The ATT suggests that HMRC modernise their approach to penalties to encourage compliance with tax rules rather than punish those who unintentionally get it wrong – especially when it comes to complying with new tax reporting obligations such as under the relatively new MTD for VAT.

Under MTD, VAT-registered businesses must keep digital records and use MTD-compatible software to submit their VAT returns. Recently published HMRC guidance¹ outlines the penalties which businesses face for failing to meet these requirements, including:

• Penalties of up to £400 per return for failure to file using MTD-compatible software.
• Daily penalties of between £5 and £15 for failure to keep digital records, or failure to use ‘digital links’ to transfer or exchange data between different pieces of software.

Senga Prior, Chair of ATT’s Technical Steering Group, said:

“It is disappointing that this is the first time HMRC, since the MTD for VAT rules were introduced over three years ago, have confirmed the penalties which taxpayers can face for getting things wrong. Even now, it seems that HMRC are still not publicising these penalties widely which means any business receiving a penalty could be in for quite a shock.

“The penalties in question are not new measures introduced specifically for the purposes of MTD but are based on existing penalty legislation which has been in place for some time.²

“It is inappropriate to apply penalties first introduced over 25 years ago, and designed for a world of pen and paper, to the new digital era of MTD.  They are penalties originally designed for an older system, and a new digital system needs new rules which reflect just how different the requirements are.”

HMRC have designed a more appropriate, modern system for late filing and payment penalties, says the ATT, but are sticking with some very outdated style penalties when it comes to MTD for VAT.

Senga Prior said:

“New penalty regimes for late filing and late payment will be introduced for VAT from 1 January 2023. These are very sensibly specifically designed to encourage taxpayers to meet their obligations and to contact HMRC as soon as possible where they are struggling to pay. By contrast, these older penalties used for MTD for VAT fail to recognise that carrots of encouragement are more likely to produce ongoing compliance with tax obligations than financial sticks.



“We would encourage the Government to take a fresh look at these older style MTD penalties and consider how they can be brought into the 21st century, with a greater focus on helping, and not punishing, taxpayers.”

Notes for editors

1. The Making Tax Digital (MTD) rules require VAT registered businesses to maintain digital accounting records and file their quarterly VAT returns to HM Revenue and Customs using designated software, unless an exemption applies. More here.
2. The penalty of up to £400 for not filing with compatible software can be found in paragraph 25A of the VAT regulations 1995 (SI 1995/2518) and first took effect for online filing of VAT returns in April 2012.  The daily penalties in respect of digital records and digital links derive from s69(1) VAT Act 1994.