Making Tax Digital – the gloves come off

26 May 2021 - Elizabeth O'Hanlon

HMRC is taking a tougher approach to businesses who have not yet signed up to Making Tax Digital.
A recent report from HMRC states that almost 90% of those that should have signed up to Making Tax Digital (MTD) for VAT have done so. But, say HMRC, around 100,000 have not. All these businesses have received more than one letter from HMRC reminding them of their MTD obligations.

A reminder of how Making Tax Digital works:
Making Tax Digital for VAT requires VAT-registered businesses, with taxable turnover above the VAT registration threshold of £85,000, to keep records digitally and file their VAT Returns using software.

It’s common for business records and accounts to be kept digitally on computers, tablets and smartphones. The records are maintained through these devices and stored using a Cloud-based application. The difference with Making Tax Digital is that the software that businesses use must be capable of:

  • keeping and maintaining the records specified in the regulations
  • preparing VAT Returns using the information maintained in those digital records
  • communicating with HMRC digitally through our Application Programming Interface (API) platform

If your digital records are up to date, the software will be able to collate and prepare your return for you. It will show you the VAT return and ask you:

  • to declare the information is correct
  • confirm you want it submitted to HMRC.

Once you’ve submitted your VAT return, you’ll receive confirmation through your software that it has been received.

If your business has sales of less than £85,000 you will need to start using Making Tax Digital in 2022, and the scheme will be extended to income tax self- assessment in 2023.

What will happen to businesses not using Making Tax Digital?
HMRC has the power to charge a penalty of up to £400 for filing a VAT return other than by using MTD software and is now considering using this power.

In the meantime, it is preparing for another, rather more drastic, option which is to close the online VAT return to those that have not signed up to MTD for VAT and should have. HMRC is writing to 800 selected traders to tell them that while they will be able to file their March/April/May 2021 VAT return by 7 July 2021 using the online VAT return, they will not be able to file subsequent returns in this way.

They will be blocked from filing the June/July/August 2021 return using the online VAT return and will need to sign up to MTD in good time to file that return using MTD software, by 7 October 2021.

HMRC intends to monitor the response to this approach before considering whether to use it more widely.

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