The first transition to making tax digital (MTD) is fast approaching. For periods beginning on or after 1st April 2022, it will be compulsory for all VAT registered traders to file their VAT returns using MTD-compatible software. The only instance whereby this will not apply will be when HMRC has agreed that the taxpayer is exempt.
Along with VAT registered traders, from the 6th April 2024, sole traders will also need to begin filing quarterly and annual income tax reports using MTD software. Most partnerships will then join the MTD regime from 2025.
To encourage taxpayers to stick within these deadlines, the Government will be introducing a new system of point-based penalties for those who file their reports late.
What Will Be The Consequences For Late Filing?
For each late filing, taxpayers will be awarded one point. There will also be point thresholds implemented, which means that should these be left to accumulate, a £200 penalty will be imposed. These thresholds will differ based on how often a taxpayer submits their return and are as follows:
| Submission Frequency | Penalty Threshold | Period Of Compliance |
|---|---|---|
| Annual | 2 points | 24 months |
| Quarterly | 4 points | 12 months |
| Monthly | 5 points | 6 months |
For quarterly returns, the 4th point triggers the £200 penalty. After this penalty is imposed, every late submission will trigger another £200 penalty. Additional penalties, however, will not add further points to the points slate.
Each point accumulated will expire after 2 years; this will start the month after the late filing occurs. It is also possible for the point slate to be wiped clean, but only if the taxpayer achieves the following:
- Zero late submissions for a period of compliance (see above table);
- All returns for the previous 24 months have been led, even if led late.
Appeals can be lodged against all points and penalties levied by HMRC.
Making Tax Digital Support
At Digital Tax Matters, we can help you comply with the MTD regulations. We offer assistance in selecting and implementing digital accounting systems, provide training and ongoing support, conduct compliance checks, and ensure accurate quarterly reporting. Many of our clients choose to outsource their digital bookkeeping to us.
You’ll need to take three steps to prepare for the changes which come into force on the 1st of April 2026:
- Ensure you have set up and have access to your own gateway:
If you haven’t already, then you will be required to create a personal gateway as soon as possible; not only is this necessary for MTD, but it is also a useful tool to keep on top of your personal tax affairs. Your gateway will link to our agent services account and create a digital handshake, which will allow us to file the quarterly returns on your behalf. You can this link to create your personal gateway. - Use software to allow a seamless exchange of information with us:
We have conducted research across a number of software providers, and we advise the best and most efficient software to help you Comply is ‘Xero Simple’‘. This software is packed with features to assist you in complying with the upcoming changes, including a live bank feed and digital receipt-capturing app. The cost for this software is £7 per month. - Set up a separate business account for business use only (includes rental income and sole traders):
If you are currently using your personal account for business transactions, we advise you to set up a separate account for business use only. This will ensure the transactions being pulled through with the live feed capture business transactions only. This will help keep your accountancy fees as low as possible and allow us to report the quarterly figures as efficiently as possible.
Please contact us and discuss this in further detail with your account manager. You can get in touch with us as a new client or for general enquiries via 01234 357595 or office@digitaltaxmatters.co.uk.