Often, when we explain the requirements of MTD filing to our clients, a common reaction is “why should I change my processes, can’t I continue submitting my VAT return as I do now?”
The polite answer has two parts:
- the VAT portal (the current online VAT return form) will be closed to businesses who are required to enter the MTD regime; and
- after the soft-landing period, penalties will be applied if the business doesn’t submit its VAT return on time, and the closure of the portal will not be a reasonable excuse.
The VAT portal closure will not happen at the same point in time for everyone, and it may not occur at all for businesses not mandated into MTD. However, if MTD for VAT is expanded to all VAT-registered businesses (and we don’t know if or when this will happen), HMRC is likely to close the VAT portal to all.
Those VAT-registered businesses which have annual turnover below the VAT registration threshold (£85,000) are not mandated into MTD, so will continue to use the existing portal to submit their VAT returns (provided they don’t voluntarily opt into MTD).
Also, all those businesses who have their start date for MTD deferred until the first VAT period beginning on or after 1 October 2019 will continue to use the VAT portal until that time.
Who is hit first?
The first businesses to be mandated into MTD are those with VAT periods beginning on 1 April 2019. The VAT portal will only close for those businesses who have signed up to MTD.
The business should wait until it receives an email from HMRC confirming it has signed up to MTD successfully. From that point on, it must submit VAT returns using MTD- compatible software. If the business tries to submit a VAT return via the portal after it has been accepted into the MTD programme, it may find that return is not accepted by HMRC.
However, the CIOT understands that HMRC won’t close the VAT portal completely to allow for teething problems with software or the signing-up procedure.
Jones Ltd has VAT periods which align with the calendar year, so its next period starts on 1 April 2019. It signs up for MTD in July 2019 in order to submit its VAT return for the period 1 April 2019 to 30 June 2019, which is due by 7 August 2019.
Unfortunately, Jones Ltd gets into a bit of a pickle with its MTD-compliant software and is not able to submit its VAT return using that software.
Jones Ltd must ask HMRC for permission to use the old VAT portal to submit its VAT return figures for the April to June 2019 quarter. It needs to show it has tried to comply with MTD, but there are genuine software problems. HMRC will have to manually override the MTD system to accept the VAT return for the April to June period through the old VAT portal.
Jones Ltd has an obligation to keep its VAT records in a digital format from 1 April 2019, but as long as those records are kept in some digital form, including a spreadsheet, this aspect of the MTD regulations is met.
There is no requirement for a business to keep its VAT records in the same software package that it uses to submit the VAT return, although there should be a digital link between the records-recording software and the VAT-submission software. That digital link will be compulsory from 1 April 2020 (1 October 2020 for deferred businesses).
HMRC is planning to bring in a new system of penalties for late filing and late payment to fit better with the MTD filing obligations. However, the draft law for that new structure of penalties was taken out of the Finance Bill 2018-2019, which is now almost through its Parliamentary stages. The new penalty system is not expected to take effect until at least April 2021.
In the meantime, existing penalties will be used by HMRC to discourage flagrant abuse of the MTD rules. The following penalties could be applied to a business which refuses to engage with its MTD for VAT obligations:
- Failure to comply with certain regulatory requirements (VATA 1994 s 69(1)): minimum £50, but maximum based on these daily rates:
- £5 per day if no previous failure in the last two years
- £10 per day if one failure in last two years
- £15 per day in other circumstances
- Failure to keep the required VAT records (VATA 1994 s 69(2)): up to £500
- Failure to file electronically (VAT regs 1995, re 25A): up to £400
All of these penalties already exist but are not automatic, and they are rarely used. HMRC is expected to issue warnings rather than penalties where the business has made a reasonable effort to comply with MTD for VAT.
In addition, if the VAT is not paid on time the existing VAT default surcharge system will apply. This can impose a penalty of up to 15% of the late paid VAT if there have been sufficient earlier defaults within the penalty period.
For further information and assistance with MTD please contact us HERE