VAT-registered limited companies using MTD software without registering for the HMRC scheme

Limited companies registered for VAT are using software compatible with Making Tax Digital without realising that they aren’t actually signed up to use the HMRC scheme.

The revelation, made yesterday by the tax office, suggests accountants have given directors the most up-to-date VAT software available, yet are leaving them at risk of penalties for not having registered them as MTD customers.

From January 2023, HMRC will introduce new late submission penalties and late payment penalties for businesses that fail to submit their VAT return on time.

'Points-based HMRC penalty system'

Businesses that miss their deadline may receive a late submission penalty "point."

And according to HMRC, subsequent failures, depending on the penalty points total incurred by the business, can make a business liable to a £200 late submission penalty.

Similarly, late payment penalties may be issued by HMRC to businesses that fail to pay on time, depending on how late HMRC says the payment is.

'Incomplete MTD sign-up'

Asked which aspect of MTD for VAT purposes that one-person limited companies struggle with the most, the Revenue explained it wasn’t the software or online part.

In fact, the tax department responded by saying it is aware of businesses which already use MTD-compatible software to keep their VAT records, and even file their VAT returns online, but their MTD sign-up is incomplete.

To avoid a MTD VAT penalty, businesses are encouraged by HMRC to follow four steps:

'Choose, check, keep, complete'

Step 1. Choose MTD-compatible software (a list of such software is available on .gov). 

Step 2. Check the permissions in the software, because VAT returns are file-able once users have allowed their software to work with MTD.

Step 3. Keep digital records for current and future VAT returns.

Step 4. Totally complete the MTD sign-up process. (Then just file future VAT returns using the MTD-compatible software).

'HMRC will change'

Last week, HMRC clarified that although the maximum ‘Filing Through the Incorrect Channel’ penalty for MTD VAT is £400, it only applies to businesses with turnover of over £22.8million, meaning it won’t apply to one-person companies.

Not everyone believes the £400 penalty will stay confined to just the few, however. One contractor reflected: “That’s just for that initial tax year of course. Then HMRC will change its rhetoric and backdate it.”

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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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