Risk of imminent VAT return filing problems under new tax reporting regime
HMRC are now automatically signing up VAT-registered businesses to its new Making Tax Digital (MTD) for VAT programme. These are businesses which should have enrolled into MTD already.1 Under MTD, businesses need to keep their VAT records digitally if they do not already do so and file their VAT returns using MTD compliant software. The Low Incomes Tax Reform Group (LITRG) warns the many thousands who are not yet complying with these MTD requirements that they will need to act now or risk left unable to file their next VAT return or pay the VAT due unless an exemption applies. This could eventually lead to them facing financial penalties.2
HMRC turned off the old VAT return filing portal to most businesses which they think should be within the MTD rules in November. This means that using MTD compliant software is now the only way to file VAT returns unless HMRC have agreed to an exemption from MTD altogether.3 The first traders to be affected by this are those due to submit VAT returns and pay VAT by 7 December 2022.
LITRG is concerned that some smaller traders, who are unable to afford professional advice, may not have fully understood the change to MTD for VAT and will find themselves signed up by HMRC but unable to file their next VAT returns because they lack the necessary software. LITRG is also concerned that some of the businesses HMRC are automatically signing up could be entitled to an exemption, in which case they would not need to purchase and use MTD compliant software at all.
Sharron West, Technical Officer at LITRG, said:
“It is understandable that HMRC have decided to act for those businesses who have not yet complied with the law and signed up to MTD following mandation. Some of these are larger businesses who should have done so as long ago as 2019.
“But we are concerned that some smaller businesses, who do not have professional agents to advise them and may not have been required to sign up to MTD until October 2022 in any case, may now be confused by their MTD obligations and run the risk of falling behind with filing their VAT return and paying their VAT bills. If they do not act quickly to choose some suitable software for their VAT record keeping and filing, they will not be up and running with it by the time their next VAT return and payment is due.
“It is very disappointing if this move by HMRC makes a trader who has always filed their VAT returns and paid their VAT on time fall behind with them.”
Sharron West said:
“Those who have grounds for claiming an exemption from MTD4 do not need to comply with MTD if HMRC grant them an exemption, nor while HMRC are considering an application to be exempt from MTD. But by automatically signing all businesses up to MTD, HMRC might rush businesses into buying software which ultimately they do not need and causing unnecessary stress and costs.
“We call on HMRC to allow a grace period so businesses who were only mandated into MTD starting from April 2022 have more time to sign up themselves so they can do so at their own pace”.5
LITRG has produced guidance to help unrepresented businesses6 and it explains there are a maximum of four steps that should be followed to become MTD compliant. The first step is to consider whether exemption applies.
Looking to the future and the introduction of MTD for Income Tax,7 LITRG is concerned about yet more digital obligations being added to the existing administrative burdens and costs that small self-employed and partnership businesses have.
Sharron West added:
“We think HMRC sometimes underestimate the disproportionate effect that mandated changes can have on a small trader running a business themselves, particularly in these hard economic times. Many small businesses are working hard to keep their business going now, with some undoubtedly still feeling the effects of the Coronavirus pandemic. Taking time out to digitise a business which is otherwise operating compliantly adds yet another burden.”
Notes for editors
- Complying with the Making Tax Digital for VAT regime became mandatory for all compulsorily VAT registered businesses starting from April 2019 and for voluntarily VAT registered businesses starting from April 2022. Businesses were required to sign up to the programme with HMRC in advance of their mandation date. Under MTD, businesses need to keep their income and expenses records for their VAT returns digitally if they do not already do so and file their VAT returns using MTD compliant software. HMRC do not have any software that can be used for this purpose so third-party software must be used. Most traders will normally complete and file a VAT return four times per year.
Approximately 2.4 million businesses are within scope of Making Tax Digital for VAT and LITRG estimates that thousands will be affected by this action by HMRC.
- A new penalty regime is being introduced which comes into effect for VAT return periods beginning on or after 1 January 2023 – see https://www.gov.uk/guidance/prepare-for-upcoming-changes-to-vat-penalties-and-vat-interest-charges. The old default surcharge regime is still in force until 31 December 2022. See https://www.gov.uk/guidance/vat-default-surcharge-notice-70050
- HMRC’s old VAT return portal remains open for anyone who HMRC have agreed is exempt from MTD for VAT obligations, or for anyone who has applied for an exemption and who has not yet had a decision from HMRC.
- HMRC have guidance on applying for an exemption from MTD for VAT: https://www.gov.uk/guidance/apply-for-an-exemption-from-making-tax-digital-for-vat
- Those who should have signed up in April 2019, and have not yet done so, are only now being signed up automatically by HMRC. The smallest businesses which were mandated into MTD for VAT between April 2022 and June 2022 have only had a very short grace period compared to the larger businesses as some smaller businesses were not due to sign up until as late as October 2022. See. https://www.litrg.org.uk/tax-guides/self-employment/what-making-tax-digital-vat#toc-table-2
- Unrepresented businesses are those who do not engage the services of an accountant or other adviser to help them with their financial affairs. This is sometimes because they choose to manage their affairs themselves or because they cannot afford to engage an agent. In our experience many small businesses manage their VAT themselves, even if they engage an agent to help them with end of tax year compliance such as tax returns etc.
- Making Tax Digital for Income Tax is a new reporting regime which HMRC are introducing on 6 April 2024 for those with self-employed or property income of £10,000 or more. They are required to report details of their income and expenses to HMRC on a quarterly basis using third party software and to complete an end of period statement and a final declaration for the tax year. For some, this will replace the need to file a self-assessment tax return. For more information see https://www.gov.uk/guidance/check-if-youre-eligible-for-making-tax-digital-for-income-tax