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What are penalties for MTD non-compliance?

Points based for latness but what about non-compliance?

When confronted by the issue of Making Tax Digital (MTD) a client of mine asked what the penalties would be for non-compliance.  Their point was that they would submit the information from spreadsheet (via bridging software) on time but the underlying records would still be paper based.  The numbers would be correct and on time and in the correct format but in breach of the detailed rules (and the entire spirit of MTD).  They argued that it might be cheaper to do this and suffer a penalty than to suffer the cost of new computers, new software, training and and additional time.

I had no answer.  Does anybody have any views on such an approach?

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By Matrix
19th Oct 2018 13:54

I don't see how anyone would ever know unless the return was investigated.

Obviously you would have to be happy they are accurate otherwise there could be penalties and your client is just delaying the inevitable.

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By tom123
19th Oct 2018 13:54

Everyone's 'underlying records' are usually paper based, surely?

Or what would you do about receiving invoices in the post?

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to tom123
19th Oct 2018 14:32

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By Lisa R
19th Oct 2018 14:47

I was just thinking the same thing about "underlying records" being paper based. Looking at the gov website, paper invoices are still ok as long as you keep them. I'm concerned now about credit card receipts. I extract the records from Barclaycard into excel and use that to note the breakdown of the VAT content of each receipt and which codes to post it to. I still keep all of the actual receipts, this is just for my own information so that everything is in one place and I know it all adds up correctly before entering onto SAGE. Does this now mean that I have to link Barclaycard directly to SAGE to get a true "digital link"? I'm sure it can be done and may well speed things up for me but I like to have options.

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19th Oct 2018 15:18

No penalties in the first 12 months we are told.

However on a practical level I don't really see how HMRC can enforce this. They do a few thousand VAT enquiries a year and there are 1.1 million VAT registered business over the VAT threshold.

Costs of compliance vs risk and cost of non-compliance its a perfectly reasonable question to ask when faced with any new legislation.

If the costs of compliance are high, and the penalties of non-compliance low it would be quite tempting to just receive client records "as is" and bosh them through using excel and bridging software on the new gateway.

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to ireallyshouldknowthisbut
19th Oct 2018 15:34

How are these enquiries going to be conducted ? HMRC, apparently, won't touch your computer in case they break it. Are you supposed to shift stuff to a memory stick ? Or print it out ? Or what ?

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to lionofludesch
19th Oct 2018 15:50

I guess all they can do is ask you how you do it.

Just like the business record checks over the phone.....

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19th Oct 2018 15:50

While it isn't yet the case, and won't be the case for at least the first year, you will at some point be submitting all the transactions for the VAT return to HMRC, not the seven boxes of the VAT return. That's how they'll know if there's a digital link to the underlying records.

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to Duggimon
19th Oct 2018 16:03

Seven ?

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to Duggimon
19th Oct 2018 16:10

@duggimon, there is nothing in the enabling legislation to suggest a full set of records is submitted.

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19th Oct 2018 16:29

I am getting concerned - this intervention is affecting my business and its taking longer to input items on SAGE one than add up the old manual VAT records . Clients who do their own books are completely baffled by SAGE One which us aimed at a competent book-keeper. I am not sure what I am going to do.

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19th Oct 2018 16:29

I am getting concerned - this intervention is affecting my business and its taking longer to input items on SAGE one than add up the old manual VAT records . Clients who do their own books are completely baffled by SAGE One which us aimed at a competent book-keeper. I am not sure what I am going to do.

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19th Oct 2018 16:30

I am getting concerned - this intervention is affecting my business and its taking longer to input items on SAGE one than add up the old manual VAT records . Clients who do their own books are completely baffled by SAGE One which us aimed at a competent book-keeper. I am not sure what I am going to do.

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20th Oct 2018 11:46

If the invoices , receipts etc have been entered into a spreadsheet first then that is perfectly fine.

If the client does the bookkeeping manually then the VAT box figures entered into a spreadsheet (which is how I initially read the OP) then not so fine.

The good news is that no penalties for the first year and then it would only be discovered if there was an investigation. I guess it depends what the penalties will be as to whether it's more cost effective.

BUT expect an announcement in the budget that its going to be put back at least a year. HMRC are nowhere near ready (and they know it imo) The GBP have not yet been informed as to the impact it will have come next April, and the gov has enough headaches going on with Brexit without MTD to worry about as well.

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20th Oct 2018 14:39

This is an interesting discussion and it seems that most share my frustrations. It would, however, be interesting to have a definitive answer to the question of non compliance penalties! It is going to cost a number of our clients quite a lot of money to comply and if the penalties are minimal it is certainly an option.

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to BSSRoberts
20th Oct 2018 15:28

BSSRoberts wrote:

This is an interesting discussion and it seems that most share my frustrations. It would, however, be interesting to have a definitive answer to the question of non compliance penalties! It is going to cost a number of our clients quite a lot of money to comply and if the penalties are minimal it is certainly an option.

I think you're dreaming if you think you will be able to get away with paying £100 or so a quarter for the privilege of keeping paper records.

With respect, it certainly will not be an option.

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20th Oct 2018 17:02

I have no desire to for clients to breach the rules but if they are going to commit to software training, investment in computers and a great deal of time it would be nice to be able to tell them the penalties would be worse. I am not in a position to do that at the current time.

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to BSSRoberts
20th Oct 2018 17:23

Some sort of points system is being mooted. Maybe we'll know more in a couple of weeks.

Are you seriously contemplating advising that your clients should break the law because the penalties are less than the cost of compliance ?

I regularly see outrageously low fines imposed for driving around without insurance but I don't advise my clients not to bother with it.

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to lionofludesch
22nd Oct 2018 09:32

I am definitely not going to be advising clients to break the law but it is an easier argument if the rules re going to be enforced and the penalties make it a sensible financial choice as well as the right legal one.

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to BSSRoberts
22nd Oct 2018 09:48

I think we have different views on what constitutes "breaking the law".

Either way, just ignoring the legislation in favour of paying the penalties isn't a long term solution but it may get your 64 year olds through to retirement.

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to lionofludesch
22nd Oct 2018 09:55

I agree with you but how do clients assess the risks if nobody knows what the penalties are going to be? Historically, HMRC have had the ability to penalise taxpayers up to £3,000 for keeping insufficinet or inaccruare records but in reality I have never seen this applied or enforced. Will the same happen with MTD?

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to BSSRoberts
22nd Oct 2018 10:06

Given that HMRC aren't going to impose penalties for a year, there are more urgent issues just now.

But here's a thought - if access to the existing Government Gateway is withdrawn in April 2019, exactly how does your client propose to submit his VAT return ?

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to lionofludesch
02nd Nov 2018 22:19

If as you suggest access to the Government Gateway is withdrawn in April 2019, how are those who are VAT registered but exempt going to submit a return? They do not have to operate MTD as their t/o is below the threshold. There was nothing on the HMRC website when I checked that out earlier today.

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to dmmarler
03rd Nov 2018 16:30

dmmarler wrote:

If as you suggest access to the Government Gateway is withdrawn in April 2019, how are those who are VAT registered but exempt going to submit a return? They do not have to operate MTD as their t/o is below the threshold. There was nothing on the HMRC website when I checked that out earlier today.

VAT registered but exempt ? You mean below the £85000 threshold ?

They'll use the Government Gateway. It's not being withdrawn for them.

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By Tornado
to lionofludesch
03rd Nov 2018 17:06

My understanding is that HMRC will identify those that are required to submit under MTD for VAT and automatically shut down access to the Government Gateway Portal.

All this whilst sorting out the Brexit chaos!

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By Tornado
22nd Oct 2018 10:15

If you look through the mist surrounding MTD, the source of this fanciful idea seems to be the belief that digital records add up more accurately than manual records can be, and transferring totals from manual records to other manual records or to digital records is fraught with errors.

All this just because the Government think machines can add up better than humans.

There is some logic to this of course, but adding up is only a tiny proportion of the processes, what about the inevitable errors that are going to arise as people struggle to understand accounting software and end with 'that seems to be OK' solutions.

A tax system based on the arrogance of those that can assuming that everyone can is doomed to failure. At least the current system takes into account the limitations of human beings, which is why you can still submit paper Tax Returns 20 years after Self-Assessment was introduced.

I am still of the opinion that MTD for VAT will not be mandatory as from April 2019 and some of the underlying rules will be relaxed. There is no point at all in the Government trying to enforce the unenforceable and the sooner they take a more pragmatic view of MTD, the sooner we can all get together and work out a proper programme for working towards a more 'digital' system in the future.

HMRC simply do not have the resources to deal with 'Enquires' or the inevitable deluge of appeals, especially as HMRC staff will probably be just as ignorant about the system as those they are dealing with. It makes absolutely no sense to deliberately create a highly contentious situation (now matter what the consequences) when there are much better alternatives.

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to Tornado
22nd Oct 2018 10:14

I've said this dozens of times but how does making things more complex reduce errors ?

I suppose one thing computers can indeed do is add up more accurately but it'll never stop the wrong data being input in the first place.

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to lionofludesch
22nd Oct 2018 10:42

You can't take that as a given, lion.

https://en.wikipedia.org/wiki/Pentium_FDIV_bug

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to SteLacca
22nd Oct 2018 11:39

You're right.

On top of that, you have irritating rounding errors.

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29th Oct 2018 13:49

The client has to evaluate the opportunity cost of keeping cloud software. Having 'Real time information' on their finances, being able to predict tax libailities smartly. Financial control, management and room for growth.

Also the saving on cost for data entry. How much do you charge the client for typing up their records onto excel at the moment? This will be eliminated with cloud software....in the long run.

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to GeorgiaD
29th Oct 2018 13:54

GeorgiaD wrote:
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Also the saving on cost for data entry. How much do you charge the client for typing up their records onto excel at the moment?

What a strange question ! If the accountant is typing up the records into Excel, what on earth makes you think that the taxpayer will cheerfully be entering his data into MTD compliant software at any time in the foreseeable future ?

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By Tornado
to GeorgiaD
03rd Nov 2018 09:44

"being able to predict tax libailities smartly."

There seems to be some assumption here that the client knows something about tax. Fine for those that do but completely irrelevant for those that don't, can't or have better things to do.

"Financial control, management and room for growth."

Many small businesses just get work at the best rate they can and then do it/sell it. In my experience, these people are talented enough to make a good living without ever preparing a budget.

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By Matrix
03rd Nov 2018 07:34

After an experience with Xero this week, I don't think using the cloud will make the returns more accurate, it is too easy to change bookings for filed VAT returns.

In Xero you can do this and it appears under late claims. The bookkeeper had reversed most of the VAT claimed last quarter. You need to be extra vigilant to pick this up.

Even though the VAT payable was much higher, neither the client nor the bookkeeper picked this up. Why? Because they place too much trust in the cloud.

I may lock it after each quarter now.

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