New Multiple Penalties for MTD ITSA and VAT!

The new HMRC penalties cover late submission, late payment and interest harmonisation and unlike the old penalties you will now get points and penalties even if you owe no tax or are due a refund! there will be no soft landing period.

The new penalties take effect:

  • for VAT taxpayers for their first VAT return period starting on or after 1st April 2022
  • for ITSA (Income tax and self assessment) taxpayers within income over £10k subject to Making Tax Digital (MTD) for their first tax year or accounting period starting on or after 6th April 2023
  • for ITSA taxpayers with income below £10k starting 6th April 2024

In theory the penalties are fairer but they can work out more expensive than the current penalties.

The new system is based on points, each late return gets a penalty point which expire after 24 months.

The points only apply to VAT and ITSA (not to other taxes at the moment)

Once the penalty threshold is reached there is a fixed penalty of £200 for each missed return, there is an appeals process.

Submission FrequencyPenalty Theshold
Annual2 points
Quarterly 4 points
Monthly 5 points

Total points will only be reset to zero once when the following 2 conditions are met

  1. A period of compliance based on their submission frequency
  2. All submissions that were due within the preceding 24 months have been submitted
Submission FrequencyPeriod of Compliance
Annual24 months
Quarterly12 months
Monthly6 months

Late Payment Penalty

Late Payment could potentially mean you get two penalties depending on when you pay!

The first penalty will be levied 31 days after the payemnt due date and will be based on a set percentage of the balance outstanding.

The second penalty will be calculated on amounts outstanding from day 31 until the principle balance is paid in full or a payment plan agreed.

Time to Pay Payment plans suspend penalties.

HMRC will notify the penalties separately.

PenaltyDays after payment due datePenalty charge
First Penalty0 to 15No penalty payable
16 to 29Penalty calculated at 2% of what was outstanding at day 15
30Penalty calculated at 2% of what was outstanding at day 15

Plus 2% of what is still outstanding at day 30
Second PenaltyDay 31 plusPenalty calculated as a daily rate of 4% on APR for the duration of the outstanding balance

There will be a ‘period of familiarisation’ for the first year which is based on 30 days.

Interest Harmonisation

The VAT interest rules will change to be inline with ITSA

  • When an amount is not paid by the due date, late payment interest will be charged to the taxpayer from the date that the tax becomes overdue until the date payment is received
  • VAT Repayment Supplement will be replaced with Repayment Interest. Repayment Interest will be paid from the later of:
    • the due date of the return
    • the date the return is submitted

If HMRC owe you interest it will be paid at the Bank of England Base Rate -1% but if you owe HMRC interest its at the Bank of England base rate +2%.

Other things to note

  • The Gateway will tell you how many points you have
  • The Gateway will tell how penalties have been calculated
  • Agents will not be able to pay the penalties
  • When appealing you will need to say who was to blame for missing the deadline
  • When claiming the deadline was missed due to a health issue a declaration of honesty is required

steve@bicknells.net

Making Tax Digital (MTD ITSA) – what will you have to do?

Making Tax Digital (which some have dubbed ‘Making Tax Difficult’) is coming.

Self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6th April 2023. However, its expected that HMRC will encourage businesses to start from 6th April 2022 to gain experience in the process before it becomes compulsory.

Its compulsory! failure to comply will result in penalties – you will have 30 days from the end of the quarter in which to file

Making Tax Digital for Landlords and the Self Employed with income over £10k

When it starts the key issues will be

  1. You will basically have 2 returns to file at the same time one for the previous year and new quarterly reporting
  2. The basis periods are expected to be re-aligned so that all the self employed and landlords start at the same time – 6th April 2023
  3. A single annual self assessment will become at least 6 new filings – 4 quarters, end of period and a new self assessment return

The primary legislation for Making Tax Digital relating to VAT and Income Tax is contained in the Finance (No.2) Act 2017.

Business will have to use HMRC approved accounting software, for example

Xero

Sage

Freeagent – free if your business banks with NatWest/RBS

Quickbooks

When we refer to MTD-compatible software, we mean software that can integrate with HMRC systems to send updates to HMRC.

HMRC is not offering its own software products but has provided the Application Programming Interfaces (APIs) that commercial software developers are using to develop a range of applications that enable businesses to keep their records digitally and integrate with HMRC systems. An API is software that links 2 or more software programmes together, allowing them to exchange data.

So there won’t be a Government Gateway where you can enter the information, you have to use commercial software approved by HMRC.

You have to have all your self employed and property businesses in a single piece of software but be able to report the information separately for each business in the following formats

Furnished Holiday Lets

Income
Accounting Basis (Traditional or Cash)
Rent paid, repairs, insurance and costs of services provided
Loan Interest and other financial costs
Legal, management and other professional fees
Other allowable property expenses
Private use adjustment
Profit or Loss

Residential Property Income

Total Rents and other income from property
Accounting Basis (Traditional or Cash)
Rent, rates, insurance and ground rents
Property repairs and maintenance
Non-residential property finance costs
Legal, management and other professional fees
Costs of services provided, including wages
Other allowable property expenses
Profit or Loss
Private use adjustment
Residential property finance costs

Self Employed

If the turnover is below £85,000 only Turnover and Total Expenses need to be reported otherwise you will need

Turnover
Accounting Basis (Traditional or Cash)
Costs of goods bought for re-sale
Car, van and travel expenses
Wages, salaries and other staff costs
Rent, rates, power and insurance costs
Repairs and maintenance of property and equipment
Accountancy, legal and other professional fees
Interest and bank and credit card etc financial charges
Telephone, fax, stationery and other office costs
Other allowable business expenses
Profit or Loss

What is the process?

Stage One – Sign Up and Software

  • Business that fall within the scope of MTD ITSA (Income Tax Self Assessment ) will need to be signed up before April 2023
  • ‘Digital Records’ need to kept on approved HMRC software
  • The minimum amount of information will be Date, Amount and Tax Category
  • The information needs to be summarised in the format noted above
  • Each property and business activity will need its own reports

Stage Two – Quarterly Reporting

  • An electronic submission of summary totals for specified categories from digital records of each business on a quarterly basis (obligation period) from software to HMRC needs to be made
  • The first submission will include designatory data
  • Updates are due from 10 days before to one month after the quarter end date
  • The update does not need to include a statement that the data is complete and accurate
  • HMRC will return a calculation of the tax liability based on the information sent but payment will due on the current pre-MTD dates (or at least for now)

Stage Three – End of Period Statement

  • Process to finalise the taxable profit or allowable loss for any one source of business income
  • The process will pull together the quarterly submissions and allow you to claim allowances and reliefs
  • You will be able to exclude disallowable expenses
  • This submission does require a declaration that the information is complete and correct
  • HMRC will then calculate the tax due

Stage Four – Final Declaration (New Self Assessment Return)

  • Referred to as crystallisation
  • It will take into account all sources of income and gains not just those from Self Employment or Property
  • Its a replacement for the SA100 tax return
  • The deadline will be 31st January
  • HMRC will provide a Submission Interface

steve@bicknells.net