The tax authority has written to agents and accountants informing them that the existing transition arrangements will end in the next three weeks and any company that is using the old system will be automatically signed up for a MTD VAT account.

From 15 May 2023 all VAT-registered businesses will have to use Making Tax Digital (MTD) compatible software to keep their VAT records and file their VAT returns.

HMRC chief executive Jim Harra said: ‘To make it quicker and easier for businesses to manage their tax affairs, we’ll sign up all remaining businesses to MTD, unless your client is exempt or has applied for exemption and is awaiting a response from us.’

It is important for businesses to take action as soon as possible or they could face a penalty.

To start using compatible software, businesses will have to invest in MTD compatible software.

HMRC has set out the steps for businesses to follow before their next return is due:

Step 1. Choose MTD-compatible software that is right for the business – a list of software including free options, is available on gov.uk.

Step 2. Check the software permissions to allow it to work with MTD. find out more at ‘manage permissions for tax software‘

Step 3. Keep digital records for current and future VAT returns – information about what records must be kept digitally

Step 4. File future VAT returns on time using MTD-compatible software. You can find out how to submit your VAT returns

How to apply for an exemption from using MTD-compatible software

If your client is already exempt from filing VAT returns online or if they or their business are subject to an insolvency procedure, they are automatically exempt from MTD.

Some businesses can also apply for exemption in limited cases. For example, if it is not reasonable or practical for the individual to use computers, software or the internet to follow the rules for Making Tax Digital for VAT. This could be because of their age, a disability or where they live; object to using computers on religious grounds; of any other reason why it is not reasonable or practical.

HMRC will consider each application on a case-by-case basis.

Penalty system  

For VAT accounting periods starting on or after 1 January 2023, HMRC introduced a points-based penalty regime for VAT returns that are submitted late and VAT which is paid late. The way interest is charged has also changed. This replaces the VAT default surcharge.

The first monthly returns and payments affected by the penalties were due by 7 March 2023.

For late submission penalties, all taxpayers will start on zero points. This includes those on a default surcharge. Any taxpayer who is on a default surcharge will still be liable to pay any associated charges already received.

The penalties for late VAT returns also apply to businesses that submit nil returns and repayment returns. Changes have also been made to how interest is calculated.

In future, late submission penalties will work on a points-based system. For each VAT return submitted late, taxpayers will receive a penalty point until they reach the penalty point threshold, at which stage they will receive a £200 penalty.

A further £200 penalty will also apply for each subsequent late submission while at the threshold, which varies to take account of monthly, quarterly and annual accounting periods.

If a VAT payment is more than 15 days late, businesses will pay a first late payment penalty. If the VAT payment is more than 30 days overdue, the first late payment penalty increases and a second late payment penalty will also apply.

To help taxpayers get used to the changes HMRC will not charge a first late payment penalty on VAT payments due on or before 31 December 2023, if businesses either pay in full or a payment plan is agreed within 30 days of the payment due date.