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HMRC to extend MTD no-penalty period for some firms

5th Nov 2019
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By Jenny Strudwick, Senior Product Manager

There’s been much talk about fines and enforcement since Making Tax Digital came into effect, but after taking an initially lenient approach, it looks like HMRC is going to cut some businesses a little extra slack.

HMRC has adopted an initial 1-year ‘soft landing’, during which it intends not to penalise those who fail to comply in time.

Businesses have until their first period starting on or after 1 April 2020 (or 1 October 2020 for deferred businesses) to be MTD for VAT compliant.

Now, officials say that some firms with particularly complicated systems may qualify for an extension.

Firms will be able to claim to have their own ‘soft landing’ period made longer.

Why has HMRC made this extension available?

HMRC has clearly seen positive results on the number of businesses registered for MTD, with many making successful submissions, but they understand that it is not going to be easy for everyone – and appreciates there are extenuating circumstances for some.

Continuing with any kind of blanket deferment for all firms would not solve the problem, rather just kick it further down the road. However, asking businesses to make a claim allows HMRC to understand the specific issues faced by businesses that cannot comply.

The process of claiming an extension might prove to be time consuming, as evidence will need to be provided, but this is data that should already be available if the business has attempted to be MTD compliant.

It will certainly be interesting to see the number of claimants and the number of successful claimants for this extension.

Who qualifies for the new extension?

Businesses with “complex or legacy IT systems” who “may require a longer period to put digital links in place across their functional, compatible software” can apply for additional time to “put the required digital links in place”, according to the latest VAT notice. This is subject to qualifying criteria.

This is particularly relevant to industries using specialist software, which can be very difficult to link to accounting and VAT return systems. One example flagged in the media has been veterinary practices who apparently quite commonly post totals from their systems into accounting software on a weekly or monthly basis. Doing so manually in this way is not permitted beyond the soft landing stage but it seems that trying to replace a digital link has proven to be extremely tricky in some cases.

Firms acquiring another business may be also among those who qualify, the notice suggests, acknowledging it “may take additional time to digitally link different software applications or packages to meet MTD legal obligations”. HMRC will consider extensions in these cases, it said.

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How tough will HMRC be on granting extensions?

HMRC did also warn that there must be good reasons for an extension, saying “the cost alone is not sufficient reason”.

The notice added: “Business are expected to make every effort to comply with the digital links requirements by the end of the soft landing period.”

So, we don’t expect HMRC to be handing out these extensions freely.

It will be interesting to see what firms struggling to comply will do to find new solutions and we’ll be keeping an eye on developments.

Want help to understand more about this extension and how to comply with MTD? Contact our team on 0344 844 9644.