At the beginning of the year, HMRC implemented a new penalties system for late VAT submissions and payments. The new points-based penalty system is arguably more lenient and better targets repeat offenders than its predecessor which automatically fined companies that missed deadlines.
As with most HMRC reforms, the new rules have received a varied reaction. While certainly viewed as fairer, especially for businesses who submit returns more often, the reform has been labelled as confusing. Namely, by having one penalty for failing to file a return and another for late payments, the risk of businesses incurring expensive penalties is high if they are unaware that the systems run alongside each other.
Organisation is key
Businesses are rarely excited when HMRC announces new reforms. However, if businesses take the time to understand what the changes encompass, there is potential for these reforms to make life easier in the long run.
To prepare, companies should ensure that their accounting team is familiar with and understands the reforms. Organisation is key – whether that be through implementing internal training or pulling together a set of written instructions, ensuring that all the parties involved know the new deadlines and receive regular reminders which will help to avoid penalties.
Companies should also consider reviewing their bookkeeping processes to ensure they are well organised and able to withstand external scrutiny. Similarly, carrying out a software audit will provide peace of mind that all relevant technology is compliant and easy for employees to use. Often, external accounting partners will help with carrying out audits and can advise on how to make the move as pain free as possible.
What are the cost implications?
Unfortunately, companies will have to be prepared to incur some costs during the adjustment period. In the short-term, employees might use billable hours to spend time getting familiar with the new software which will impact profits. Ongoing training, buying new software and user licences and perhaps even hiring new team members may be required to help with the transition. For some businesses, especially those struggling because of the cost-of-living crisis, dealing with even a one-time expense might pose a problem.
Having said that, these short-term financial investments will be worthwhile in the long-term. Investing in training and new software will ensure that companies stay on top of their bookkeeping processes and support their digital transformation, whilst also avoiding unnecessary fines.
HMRC also has a duty to ensure these reforms have a positive outcome for all. Ongoing changes and delays with the roll-out of the Making Tax Digital (MTD) scheme has created significant confusion for businesses. Now more than ever, businesses need clear information and plenty of notice before further changes are implemented.
What does the future look like?
Whilst new reforms have only just been rolled out, people want to know how the new system might impact other types of taxpayers. The new system is currently only tied to VAT submission and has not impacted Income Tax Self Assessment (ITSA). MTD is also live for VAT but there have been delays for its roll-out with ITSA, but this will change in the next couple of years.
The new penalty scheme was due to apply to Self Assessment taxpayers earning over £10k per year from April 2024, when they would also have been expected to use MTD for ITSA. HMRC planned to extend the system to all taxpayers using ITSA the following year.
However, as is often the case with HMRC plans, there have been delays. These plans are currently delayed by two years, so the first stage of MTD ITSA is expected to begin in April 2026, but this will only apply to self-employed taxpayers who earn over £50k. The new rules will then apply to all Self Assessment users in later years.
Therefore, it seems unlikely, that the new VAT penalty scheme will be rolled out to self-employed taxpayers before MTD is applied to all ITSA customers, but the possibility of it happening shouldn’t be ruled out. To be safe, and save hassle in the long run, it’s best to register for MTD now to make for a seamless transition when it does happen.
While concerns over the confusing nature of this new system are completely valid, for most companies it is a fairer system. There are a number of steps that businesses can take to ensure they remain compliant and avoid penalties but also provide the opportunity to review and update current processes. While potentially expensive and time consuming, this new system will likely benefit a lot of businesses and the long-term rewards are certainly worth keeping in mind.