New Making Tax Digital (MTD) Penalties Introduced To Encourage Compliance

HMRC have published details of how to avoid penalties for Making tax Digital for VAT (MTD for VAT). Accountingweb.co.uk reported that HMRC has resurrected two rarely used VAT penalty provisions from 1994/1995 to encourage compliance.

The MTD for VAT rules state you must use compatible software, keep records digitally and use digital links to transfer or exchange data once you have signed up to MTD for VAT. The process is to ensure that there is no human intervention to change invoices and therefore avoid being VAT.

MTD for VAT is mandatory for all VAT registered businesses now and comes in for sole traders and landlords (MTD for ITSA (Income Tax Self-Assessment)) from April 2024.

Here are details on how to ensure your compliance with MTD for VAT and ensure compliance:

Register For MTD

An agent (such as Cashtrak) can register you for MTD or you will need to contact HMRC to register. Please note that you must have compatible software before you sign up.

Compatible Software

Your software must:

  • record and store digital records
  • provide information and VAT returns from the data held in those digital records to HMRC
  • receive information from HMRC

Click here for compatible, functional software.

Keeping Digital Records

Some records must be kept digitally within your software. It must contain the following:

  • Business:
    • name
    • address
    • VAT registration number
  • adjustments from calculations made outside of the software for any VAT accounting schemes you use
  • the VAT on goods and services you supplied (everything sold, leased, rented or hired)
  • the VAT on goods and services you received (everything you bought, leased, rented or hired
  • adjustments you make to a return
  • the ‘time of supply’ and ‘value of supply’ (value excluding VAT) for everything bought and sold
  • the rate of VAT you charged on goods and services
  • your reverse charge transactions (where you record the VAT on the sale price and the purchase price of the goods and services you buy)
  • copies of documents that cover multiple transactions made on behalf of your business:
    • those made by volunteers for charity fundraising
    • a third party business
    • employees for expenses in petty cash

Digital Links To Transfer Or Exchange Data

If you transfer or exchange data within and between software programs, apps or products (that make up functional compatible software), and the information forms part of your electronic account, this must be done using digital links.

Each piece of software you use must be linked digitally. You must not transfer or exchange data manually.

Examples of digital links are:

  • linked cells in spreadsheets, including the use of ‘cell number/return’ functions
  • emailing a spreadsheet containing digital records so the information can be imported into another software product
  • transferring a set of digital records onto a portable device, such as a pen drive or memory stick, and physically giving this to someone else to import that data into their software
  • XML, CSV import and export, and download and upload of files
  • Application Programming Interface (API) transfer

Please note – the use of ‘cut and paste’ or ‘copy and paste’ to select and move information is not a digital link.

Software Checking Functions

The checking functions must be used within your software to ensure returns are correct before filed. It is good practice to download a copy of the return before you file it if you can.


If you file your returns without using compatible software, you could be charged a penalty of between £100 and £400 (dependant on turnover) for every return.

If you do not keep these records digitally, you could be charged a penalty of between £5 to £15 for every day on which you do not meet this requirement.

If you do not use digital links to transfer data between pieces of software, you could be charged a penalty of between £5 to £15 for every day on which you do not meet this requirement.

If you file a return that contains errors, you will have to pay back any VAT that you owe. We may also charge you a penalty of up to 100% of the VAT you owe.

Accountingweb have reported that:

“There is no soft landing for VAT returns or payments under MTD. Persistent lateness can result in eye-wateringly high penalties of up to 15% of the VAT due. Two new penalty regimes, designed specifically for MTD filings and payments, will be phased in for accounting periods beginning on and after 1 January 2023. These new penalty regimes will provide far more flexibility for traders to be slightly late with payments or filing without incurring penalties.”

More Information

Our bookkeeping and ITSA services are MTD compliant and we already use MTD compliant software for all of our ITSA clients meaning no last minute problems.

Contact us today for a quote, we don’t like with pushy sales people so if you don’t want to take up our award winning, cost effective service, we won’t bother you again!

A more, in depth explanation of MTD for VAT can be found by clicking here.


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