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Making Tax Digital - The Penalties and How to Avoid Them

4 minute read

On 1st April 2019, HMRC is to roll out a new plan to improve business effectivity and efficiency. The plan sets out to change the taxation process, primarily by transferring it to a digital-based platform. Initially, this is only going to affect businesses that are VAT registered and have an annual income of over £85,000.


If all goes to plan and this first phase is a success, it’ll be introduced to all businesses by April 2020, at the earliest. The switch is undoubtedly going to cause concern for some businesses that’ll need to change the way they operate. This is completely understandable but it’s a needs must to work in this new, revolutionary way.

If businesses don’t comply and utilise the new way of keeping on top of your taxes and simplifying your bookkeeping, there can be penalties and sanctions issued by the government. Don’t worry if you’re not sure what they are, this post will cover everything you need to know about Making Tax Digital (MTD) penalties and will include some handy tips on how you can avoid being penalised.

We’ll be covering:


What Can Businesses Be Penalised For?


Late Payment Penalty Interest

This new plan has introduced a consultation period that is set to replace the existing late payment surcharges and other penalties in place. MTD proposes to calculate an interest that aligns with the lateness of the payment. So in essence, the later the payment, the more interest you’ll have to pay.

The proposed late penalties plan has two parts to it. These are:

  • After 30 days of a missed payment, a five percent interest charge will be added to your owed sum. However, if action is taken between 0-15 days of the payment being overdue, HMRC may refund or remove the interest penalty charge. If the payment is made between 0-16 days, it’s likely that the penalty will be reduced.

  • If payment still hasn’t been received longer than the 30-day grace period mentioned above, then a separate interest calculation will be made. This rate will not be linked to the Bank of England base rate and will be calculated accordingly.

If you’re unable to make the payment for any unforeseen circumstances, there is relief available and exceptions can be made. An assessment will be made of your situation and then the penalty will be recalculated with this in mind.


Once your penalty has been amended, your penalties will only be charged from the amendment date.


Late Submission Penalties

HMRC has introduced a point-based penalty system for business tax submissions. This means that every time a business submits their tax declarations or other important documents late, they’ll receive one point. Once a business has accumulated a number of penalty points and tiered financial penalties will be handed out.

The punishments will depend upon the way in which a business decides to update HMRC with their declarations. The proposed point-based penalty thresholds are:

  • Annual submission - two points.

  • Quarterly submissions - four points.

  • Monthly submissions - five points.

This point-based system allows businesses leeway while they’re still bedding in their new software and trying to even out any teething problems with the new way of operating. You won’t incur any financial penalties until you reach a certain threshold that’s relevant to your submission plan.

Plus, after periods of good compliance, points will expire. You can also appeal to any points or penalties you may receive should you deem them to be harsh and incorrect.


When Will the Making Tax Digital Penalties Begin?


The actual legislation is yet to be published surrounding the financial level of the penalties. However, HMRC is expected to introduce a soft-landing period of 12 months before late submissions financial penalties are introduced. This allows businesses to settle into the new system and become completely familiar with the new platform without facing any repercussions should there be any mistakes. 

Although there are no late submissions fines until April 2020, penalties will still be issued from April 2019 for businesses not complying by keeping digital records. A business’ first offence is likely to cost them around £500, but depending on the severity of the offence, it could reach a maximum of £3000.


How Can Businesses Avoid Being Sanctioned?


Like anything, when learning something new, it can be easy to make mistakes. But, with the 12-month soft-landing period, there’s a lot of leeway on late submissions for you to get used to.


However, to avoid any penalties immediately, these top tips will keep everything running as smooth as possible:

  • Invest in a top-quality bookkeeping platform. Working with new legislation and in a new way can be tricky, so mistakes can be more common. A top-quality bookkeeping app or software will keep you out of trouble and help you track your tax and bookkeeping much more efficiently.

  • Don’t leave it last minute. Tax submissions can be lengthy tasks and in the past have been known to be pretty stressful too. Put the work in well in advance and you’ll find it’s much less stressful. Plus, you’ll get into good habits too.

  • Keep business and personal separate. Open more than one bank account so you can differentiate between transactions. If you operate solely from one account, things can become very messy, very quickly.

Find Out More About Making Tax Digital


MTD is a big change for a lot of businesses and can affect them in various ways. Whether it’s changing the way you operate or just becoming more technological, it can seem quite daunting to start with. But, it needn’t be.


We’ve put together a comparison sheet that covers everything you need to know for when MTD eventually affects your business. Download it free below.

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