MTD for VAT penalties and reporting requirements

Since April 2022, all VAT-registered business have had to comply with Making Tax Digital for VAT. This includes firms with a turnover of less than £90,000 (£85,000 before April 2024). Since then, a number of clients have asked us about when HMRC imposes MTD for VAT penalties, and how much they are. As a result, we’ve written this post to clarify what penalties exist and why they might be applied.

Electronic filing

Under the MTD for VAT rules, you must file your VAT return electronically every quarter. You need to do this with compatible software that can not only record and store digital records, but can also send and receive data to HMRC.

If you do not file using ‘functional compatible software’, you can be fined up to £400 each time.

Digital record keeping

You are required to keep certain records digitally within your compatible software. These are:

• Business name, address and VAT number
• Adjustments made outside the software for any VAT accounting schemes you use
• VAT charged on supplies made
• VAT paid on supplies received
• The time of supply and value (excluding VAT) of everything bought and sold
• Rate of VAT charged on goods and services
• Reverse charge transactions
• Copies of documents that contain transactions made on behalf of your business (for example, expenses paid out of petty cash)

If you don’t keep these records digitally, the taxman can fine you between £5 and £15 for each day of non-compliance.

Use of digital links

If you transfer or exchange any of the above data between software programs or apps, you need to do so using digital links. (In this post we explain what digital links are in more detail). Put simply, digital links provide HMRC with an audit trail through your accounting systems right up to the figures on your VAT return. If you use MTD for VAT compliant software like FreeAgent, this will take care of digital links for you. One thing you must not do is cut and paste or copy and paste information from one piece of software (such as a spreadsheet) into another (such as a cloud accounting platform).

Failure to use digital links can land you with a penalty of £5 to £15 for every day that you don’t comply.

Checking your MTD for VAT returns

Most MTD for VAT compliant software has a checking function built in. You need to use this to make sure your returns are correct before filing them.

Why? If you submit a return with errors, you’ll have to pay back any VAT you owe. You may also be hit with penalty of up to 100% on what you owe.

How to avoid MTD for VAT penalties

Avoiding MTD for VAT penalties needn’t be difficult. The best way of doing so is to use cloud accounting software such as FreeAgent. These packages take care of things like digital links, from initial data input through to your final return. So, if you’re still relying on spreadsheets, we strongly recommend making the move to accounting software. Doing so will make it much less likely you’ll make errors – and get hit with penalties.

Further reading: HMRC’s guide to MTD for VAT