HMRC’s maximum MTD VAT penalty ‘won’t apply to contractors’

HM Revenue & Customs has clarified that the maximum penalty for fluffing Making Tax Digital for VAT won’t apply to contractors.

The clarification came after FreeAgent observed that taxpayers who fail to file their VAT return through ‘functional compatible software’ could face a penalty of “up to” £400.

While the penalty for filing a VAT return via an incorrect channel does indeed max out at £400, HMRC pointed out that only enterprises exceeding £22.8m in turnover will pay it.

'Filing Through the Incorrect Channel'

Moreover, MTD VAT penalties will not hit any business until January 1st 2023 (a delay HMRC agreed to in January 2022), and even then, £100 will be the most common penalty.

That’s because the penalty amount which businesses will incur for ‘Filing Through the Incorrect Channel’ will be dependent on turnover, with the first £100,000 capped at £100.

The FTIC penalty for businesses turning over between £100,000 and £5.6million (inclusive) is £200 – likewise though, only where they file their VAT return incorrectly.

'Penalty points'

According to HMRC, a FTIC penalty of £300 will apply on turnover between £5,600.001 and £22,800.000 (inclusive), while the maximum £400 penalty applies at £22,800.001 or above.

Also from January 1st 2023, penalty reform for VAT will replace HMRC’s default surcharge with new late submission penalty points, on top of late payment penalties. 

The new regime from the Revenue will mean that businesses which fail to submit their MTD VAT return on time face receiving a late submission penalty “point.”

And subsequent failures, depending on their business’s penalty points total, could make a business liable to a £200 late submission fee.

As to late payment penalties for the VAT side of MTD, the tax authority plans to impose them on businesses failing to pay on time, depending on how late the payment is. 

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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