Digitalisation of VAT returns is not the only change taking place under Making Tax Digital. The penalties regime for late submission and payment of tax is also getting an overhaul, with a new points based system for late filing and late payment of VAT due to be phased in. Initially planned for this April, the regulations were withdrawn from Finance Bill 2018-19 and are now not expected until at least April 2021. This leaves businesses with an additional challenge of understanding how and when the old system of non-automatic penalties will apply, particularly during the first 12 months of mandation, the “soft landing” period.
Under what circumstances will HMRC implement penalties?
Simply put, the soft landing period, as outlined in VAT Notice 700/22, has no relevance to penalties for late submission or late payment. It’s there to give the business time to implement digital links between digital record keeping systems. So, what happens if something goes wrong with your new MTD process?
HMRC has clearly stated that, during the first year of mandation, it will take a light touch approach to digital record keeping and filing penalties where businesses are doing their best to comply with the law. But this is not a blanket ‘no penalties promise’ as there is no such leeway for late payment. The default surcharge system will apply so even if you have problems filing, pay your VAT on time or risk invoking a surcharge period that could result in escalating surcharges of 2%, 5%, 10% and 15% for repeated payment defaults in surcharge period.
It is also worth noting that late submission of a return alone does not result in a default and HMRC’s view is that no soft landing is required in this respect because the default surcharge can be avoided by paying the VAT due by the deadline and is not charged for the first default.
This has real repercussions for those deciding on when to take the plunge and migrate to Making Tax Digital for VAT. MTD applies from the point of sign up to all current and future returns. Time the switch wrongly and the business could have insufficient time to change over to the new process and submit their current VAT return on time. Furthermore, reports have confirmed that the registration process for those paying by Direct Debit will take seven days to complete and users have been advised that it will not be a real-time service, making it vital businesses plan their crossover date carefully. Therefore, the window for signing up for MTD if you pay by direct debit and are in stagger 1, is between 15 May and 30 July for your April to June 2019 VAT return, otherwise there is a wider 9 May to 4 August window.
Points and payments
The new system will be introduced over a ‘staged implementation period’ after which the two new penalties for late submissions will be applicable to all those within the income tax self-assessment and VAT regimes (with the exception of those who submit returns occasionally or on a one-off basis). Each tax will have a separate points submission process with a wider rollout to other taxes, including corporation tax, expected at a later date.
The penalty system will comprise:
- Points-based late submission penalty regime where taxpayers will automatically receive a point every time they fail to submit a VAT return on time.
- Late payment interest charged from the date that the payment was due until the date that the payment is received. This surcharge will remain unchanged until 2021.
Unlike under the old system, there will be no daily or tax-geared penalties (HMRC currently applies a charge from 2 percent rising to 15 percent of the tax due where a return has not been filed or payment made on time).
How it works in practice
The system assigns the entity one point for each late submission. When a threshold of four points has been reached, an automatic fixed penalty will be issued for each subsequent failure to make a return on time.
Points do not accumulate indefinitely and will be wiped and the clock reset after four compliant submissions (i.e. equivalent to four quarterly returns or one year) from the date of the last late submission. The quantum of the penalty charges are not yet known but are expected to be higher than at present.
Late payments will be dealt with separately and will incur a surcharge penalty. These won’t apply until after the first default and will then be charged at 2.5 percent after 15 days, doubling to 5 percent after 30 days, with daily penalties charged thereafter.
The system should be fairer than at present because there will be a separate points total for each entity and also each tax, preventing those with multiple entities from being unfairly penalised.
What about the current VAT penalties?
HMRC has the power to levy the following charges but seldom does so. These are largely considered discretionary and include:
- VAT Act 1994 s69(1) – penalty for failure to comply with certain regulatory requirements charged at £5 per day for those who have had a clean track record for the past two years; £10 a day for those with a single misdemeanour during that period; or £15 a day for repeat offenders. There is a minimum penalty of £50 up to a maximum of 100 days
- VAT Act 1994 s76(2) – penalty can be issued if HMRC has issued a written warning in the last two years.
- VAT Act 1994 s69(2) – penalty for a failure to keep the required VAT records can be charged at up to £500 but cannot be applied as well as VAT Act 1994 s69(1), it’s an either or scenario
- VAT 1995 reg 25A – penalty for filing a VAT return other than electronically without prior agreement from HMRC which is charged at up to £400.
In addition, other penalties HMRC can apply are for under declaration of VAT due to inaccuracies in the return, failing to register for VAT, failing to notify HMRC within 30 days of an underassessment of tax, and penalties for late filing and/or late payment where a default surcharge has failed to trigger payment.
What you need to do now
As I said earlier, once a business has committed to MTD it will no longer be able to use the current HMRC VAT portal. Therefore, businesses should:
- Sign up once the final non -MTD VAT return has been filed.
- Only sign up when they are truly ready to file under MTD.
- Allow enough time for the HMRC changeover process. This can take 3 – 7 days from applying to join MTD until HMRC send confirmation that the business records have been migrated to the new system, dependent on whether the business pays by direct debit.
This makes it imperative that the new compliance process has been tried and tested in advance of the first MTD submission. Ideally, the MTD software will incorporate a simulation environment within which the tax team can safely explore the process and carry out a dry run.
What to do if things go wrong
Pre-test your filing and identify your migration window. Don’t leave filing the VAT return to the last day and make the payment on time. Should you get into difficulty…
- Ensure you can prove your processes have been tested as this could help verify payment has been attempted
- Contact your Customer Compliance Manager immediately at HMRC if you have one and ask for guidance
- If you use AlphaBridge or AlphaVAT, contact us here at the Tax Systems support desk for assistance