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.”
