Making Tax Digital: Penalties for non-compliance

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The Making Tax Digital requirements will be ignored by taxpayers unless there are sanctions for non-compliance. Rebecca Cave looks at the proposed MTD penalty regime, which also covers late payment and interest.

Simplification needed

To make Making Tax Digital (MTD) work, the tax system needs to be simplified. HMRC has tinkered around the edges for income tax records by introducing the cash basis for traders, and a different cash basis for landlords (not so simple then!). VAT has had the simple flat rate scheme for small businesses complexified by the limited cost trader rules. But the real challenges for automation of tax compliance are posed by the various systems of penalties for late submission and late payment, which are currently different for each tax.  

The payment date for VAT is not due to change with the introduction of MTD for VAT, and HMRC has said that it is not proposing to change the payment dates for other taxes.

VAT out of line

The surcharge penalty system for VAT applies for both late payment and late filing and can result in huge penalties for VAT payments which are only one day late, as Neil Warren explained.

In a consultation, HMRC has proposed to:

  • align the VAT rules for late payment interest and repayment interest, with those which apply for income tax and corporation tax; and    
  • introduce a new model of late payments penalties, which could be rolled out to all taxes in due course.

Late payment reform 

In 2009 the rules for interest and penalties for late payment were redrawn for all taxes, but the revised rules were not introduced for corporation tax or for VAT. The current proposals for penalties and interest for late paid VAT pretty much mirror the 2009 proposals.

The VAT default surcharge would be replaced by interest charged on the late-paid tax from the day it was due to the day of payment, so the interest charged would be in proportion to the degree of lateness.

In addition, if the VAT was paid more than 15 days late, a 2.5% penalty would apply. Where the tax was still outstanding after 30 days a 5% penalty would apply. If the taxpayer has a reasonable excuse for the late payment or has made a time to pay (TTP) agreement with HMRC within the first 15 days, the penalty will not apply.

However, if the TTP is not made until 16 days after the due date the 2.5% penalty would apply. The CIOT has pointed out that 15 days is not long enough to reach a TTP agreement in many cases.

Late filing penalties  

Back in March 2017, HMRC consulted on penalties for late submission of MTD reports. It presented three alternative models:

  • points given for each failure
  • regular review of compliance  
  • suspension of penalties

In December 2017, HMRC announced that it was to take forward the penalty points system, which it said will work as a coherent package with the interest and penalties for late payment as described above.

Points mean penalties

The taxpayer will gather points every time they are late submitting an MTD report. As there will be separate MTD reports for each tax, there will be separate points awarded for each tax.

A taxpayer who has several businesses, for example a trade and a lettings business, will have to submit separate MTD reports for each business and for each tax. Thus, a sole trader will potentially gather more late submission points for their multiple businesses, than a company which can contain more than one trade, reported on a single corporate tax return. We don’t yet know how frequently a company will have to submit MTD reports. 

Once a points threshold is reached, a financial penalty is applied. For quarterly MTD reports this is expected to be at four points, equivalent to a full year of quarterly reports. If the taxpayer has perfect compliance for a set number of MTD submissions, their points total is reset to zero. For quarterly submissions, four submissions delivered on time will reset the penalty clock to zero, if all MTD submissions for the previous 24 months have also been received.

Points will also generally expire after 24 months. The taxpayer will be able to appeal against both points and penalties.

Soft landing

Although MTD for VAT will start for VAT periods beginning on and after 1 April 2019, the new model of penalty points for late VAT returns will not be applied until 2020. It is not clear whether the current VAT surcharge system will apply to VAT returns submitted under MTD within that “soft landing” period of 2019/20.

Further consultation

There is a lot more detail to be worked out with the proposed penalty points system, including the financial level of the penalties to be applied.

This detail will be set out in the draft law and regulations which are due to be released for further consultation later this year. 

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

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05th Mar 2018 10:26

Would it not be a novel idea to get it working correctly then worry about penalties. I like most people I speak to are frustrated with any dealing as it is with HMRC and no doubt MTD will be a shamble to begin with and just when it gets bearable to work with, they will dump it for something else that will also not work.

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05th Mar 2018 10:36

Although we have all had a good deal of warning about the introduction of MTD, it is clear that HMRC will be looking at penalties as an income stream rather than encouragement to adopt this ridiculous new policy.

They would have been better employed devising a free software package similar to VAT, PAYE, RTI etc so that the little people who simply can't afford commercial software packages would have the chance to stay within the legislation, without incurring accountancy fees or penalties.

But HMRC are now so far removed from real life that they have lost the art of understanding what these little people have to deal with on a day to day basis. This is an accident waiting to happen.

No wonder so many people head for the black economy. I'm thinking of joining the queue......

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to CORSALOVER2
05th Mar 2018 12:16

CORSALOVER2 wrote:

They would have been better employed devising a free software package similar to VAT, PAYE, RTI etc so that the little people who simply can't afford commercial software packages would have the chance to stay within the legislation, without incurring accountancy fees or penalties.


This is one area where HMRC have made the correct decision, in my opinion. As others have pointed out on this thread and elsewhere, HMRC do not have a good record of handling IT projects, so having them design the app or web interface would simply lead to further problems. They have rightly left the design to commercial software companies who have the skills and will vie with one another on price and features to develop high quality options at competitive prices.

MTD does not launch for another year (and there will be no penalties until at least 2020), so the "little people" (as you describe them) need not worry for a while yet if they do not yet use MTD-capable software. There is already software that costs about £5 pm and if a business with turnover in excess of £85,000 cannot afford £60 a year to comply with their tax responsibilities, then they should consider winding up the business. I am sure that, within the next year (and certainly two, when MTD penalties kick in), there will be lots of competition and much cheaper options (perhaps as low as £1 pm or even free, advertising-supported software) will be available.

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to charliecarne
05th Mar 2018 12:26

You've missed the point Charlie. This rubbish is going to be forced on us in an unworkable timetable.
Do you really think that business earning between £10k and £85K are going to do quarterly figures???????????
£1 per month. Can you send me a bottle of what you're drinking please?

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to charliecarne
05th Mar 2018 12:35

£60 per year may be a small amount to you. But what about the cost of upgrading computers to run the software and the cost of getting the knowledge to use it. I run a small business that is VAT registered and we have always used paper based accounts, Simplex D, and then entered the required figures online as and when required using the VAT form from HMRC, Self Assesment is done the same and we use HMRC software for our wages. The time required to enter all the figures on a computer is often in, my experience, far longer than a simple manual form. In the 18 plus years that I have been trading there has not been one instance that we have been late submitting. Luddite maybe but if it isn't broken why try and fix it.

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to Plantsman
07th Mar 2018 19:54

Same here.
It would be useful if HRMC could name some of these £5 a month products that will meet the requirements (not that I ever rent anything even software - I always buy outright so even paying a monthly fee offends me) so we can have a look at it now and start considering what to buy.

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to EnglishRose
07th Mar 2018 20:21

HMRC will probably provide a list of compliant products once MTD launches (not when it's in beta, but when it is formally launched). At the moment, they cannot say which companies they are working with as it is commercially sensitive information. But the companies themselves are free to announce their compliance with MTD (and they do). Check out posts on AccountingWEB and look at what is marketed at Accountex and elsewhere. The major players (Xero, QBO, FreeAgent, etc.) will all have MTD-compliant software. I stated above that QBO have a simpler offering called QBSE (QuickBooks Self-Employed) that is currently at £3 pm and will integrate with the accountants' platform (QBOA) in the next month. There are also new entrants that are combining an app-based fully featured banking service linked to MTD-compliant software - check out Countingup.com which is £9.95 pm, which may seem high, but this includes the bank fee, for which the major banks typically charge approx £5-6 pm (so the accounting side is effectively £4-5). I have no doubt that many more will launch in the next year, as they all see a way to grab a slice of the massive MTD market.

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to charliecarne
08th Mar 2018 09:01

Charlie, (no I'm not picking on you, but you seem to been brainwashed either by IT or your software providers) how can any software house claim to be MTD compliant when the software for MTD hasn't even been developed yet? Yes we know what the end product is supposed to look like and do, but you need that bit in the middle to make it all work. "Massive MTD market"??????

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to Plantsman
26th Mar 2018 16:04

Agree wholheartedly with you.
Accountants are the wrong people to respond. It is you the taxpayers who have to administer the scheme.
Some accountants have their noses up their ... you know what I mean.

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to charliecarne
05th Mar 2018 13:02

I think what offends is that HMRC aren't too sure how or when it will all work (or why it exists at all), yet are announcing the penalties for non compliance.

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to charliecarne
05th Mar 2018 13:26

I thought Charlie Carne's post was arrogant and unhelpful. My wife and I ran a small business for many years and there were periods when an extra £60 would have come straight out of our grocery budget, it was that tight. To say nothing of the endless additional complications that turned a half-day a week bookkeeping job into something much more, and then the failed computerisation which left my poor wife in tears. That was the evening I said, "Let's just get rid of it". People who are able to build big businesses or who work as employees frequently fail to understand just how tough life can be for small businesses and the self-employed. I don't understand why Charlie Carne put "little people" in inverted commas. We certainly felt like little people when we were bludgeoned into submission by the endless complications of modern business life.

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to C.Y.Nical
06th Mar 2018 07:01

Just because someone expresses an opinion different to yours doesn't make them 'arrogant.

If anything coming on a forum and anonymously branding someone else 'arrogant' for politely expressing an opinion is just plain rude.

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to charliecarne
06th Mar 2018 09:03

johnjenkins wrote:

You've missed the point Charlie.......Do you really think that business earning between £10k and £85K are going to do quarterly figures???????????

I wasn't commenting on the merits of MTD in principle, nor on the onerous reporting requirements for small businesses. I have made my (generally negative) views known on that subject many times on other threads on this site and elsewhere. I was simply suggesting that HMRC's decision not to build a tool themselves was sensible, given their poor history in this respect. I am, quite frankly, surprised at the number of people who (rightly) condemn HMRC's ability to run major IT projects on time and on budget and yet, at the same time, complain that HMRC aren't developing MTD software themselves!

Plantsman wrote:

£60 per year may be a small amount to you. But what about the cost of upgrading computers to run the software and the cost of getting the knowledge to use it.......we have always used paper based accounts, Simplex D, and then entered the required figures online.


C.Y.Nical wrote:
there were periods when an extra £60 would have come straight out of our grocery budget

I stated that software was already available for £60 pa and that I strongly suspect that there will be basic options available in the next year or two that will be much cheaper, or even free. QuickBooks has a self-employed version that is already discounted to £3 pm which may offer wider discounts once it launches into the QBOA accountants' platform in the next month. As for computer costs, the advantage of the cloud is that very little processing power is required to run these applications as they are not installed locally, but run through a web browser. A 10-year old PC running free Linux or an old copy of Windows or Mac OS will do fine. They also work via phone apps, requiring no desktop computer at all. And the cost of gaining the "knowledge to use it" is the same whether HMRC or third parties design it (I'd argue that it will be cheaper in the latter case, as commercial entities usually offer better training material than HMRC). Even a Simplex D book costs about £10 pa, so that's not free either.

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to charliecarne
06th Mar 2018 09:22

Charlie, I was making the point that MTD in whatever guise or whoever builds the "tool" will not make it work.
I certainly dispute your costings especially when you look at the possible "cloud" problems. I spent a year on the cloud - no thank you.
Charlie, there is no possible way software will come down in price. Once everyone is on board (if ever) then there is no where else to go, so the market will see the demand and increase the price. Basic economics.

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to johnjenkins
07th Mar 2018 09:59

You're absolutely right, John. I can't believe how much Google are charging for email these days, nor Dropbox for file storage.

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to charliecarne
07th Mar 2018 11:20

Charlie, you really must look further than your nose. You know nothing comes for free. Come on what's e-mails got to do with MTD. Oh yes, of course, silly me, press the button on the phone and Accounts and Taxes all done.
The cloud really has an apt name.

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to johnjenkins
07th Mar 2018 12:41

You're conflating the complexities of MTD with the cost of the software. I agree with most people on here that MTD is more onerous than necessary and will impact too many very small businesses and landlords. You are right to highlight the daftness of HMRC's belief that, just by pressing a button, all of the data will have been miraculously coded correctly. But my points have been directed solely at the issues of (i) whether HMRC or commercial business should develop the tools and (ii) the cost of the software.

You argue that, once everyone is forced into MTD, commercial interests will drive costs up. I disagree. The cost of developing software (particularly when linked directly to a bank account and run in a phone app) are getting ever cheaper. I gave the example of QBSE (already down to £3 pm) and you could look at the newly launched Countingup from Tim Fouracre (founder of Clear Books). I further suggested that a very basic tool might be marketed as a free product; eg by a major bank to encourage use of their banking services, or funded by advertising (like Gmail), or as part of a freemium solution that can upsell to a paid-for, fully featured version. I did not claim that Gmail itself would be an MTD solution, as you seem to be implying. You claim that "there is no possible way software will come down in price" - but history suggests otherwise.

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to charliecarne
07th Mar 2018 14:20

The cost of R&D for MTD currently at approx. £3.5b will have to be paid for somehow, Charlie. So let's have a look at the next, say 5 years. Business from £85k upwards are FORCED to have software, so prices WILL go up. Business between £10k and £85K will be FORCED to have broadband, computers and software (I'm assuming those business over £85K have all except software) so prices WILL go up. Now will software houses compete with each other or do a deal to keep prices higher? Levi jeans is a classic example. Iris is another.
However, Charlie, we will all look for the cheapest way possible to be compliant and then you get what you pay for.
What's even worse is that we don't even know what the final outcome is going to be.

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to charliecarne
07th Mar 2018 19:57

I will have a look at Quickbooks. I don't even use that Simplex thing though - my accounts are writtein Word format. I have never been late in 20 years and always got things 100% right and don't really feel I have a second of spare time to waste on learning new stuff which as no benefits to me. We also don't have great interent use here and I would not want to use cloud storage for security reasons so I have a lot of other issues with this kind of change. we have little mobile signal and I only use the mobile when out for email so I would not use any kind of phone app.

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to charliecarne
26th Mar 2018 16:01

Do you work for HMRC?

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By ralan
05th Mar 2018 10:48

Just found out another client has been dropped from my G Gateway, about 6 in last 12 months so if this is happening now what will happen when MTD gets up and running.
Yes HMRC are on the rails to a big crash and we will be left to pick up the pieces and take the agro from clients as we have been doing for years.
Me thinks this might be a good time to look at retiring.

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05th Mar 2018 10:57

Extract above
'Although MTD for VAT will start for VAT periods beginning on and after 1 April 2019, the new model of penalty points for late VAT returns will not be applied until 2020.'
We still have a little bit of time, I am fed up with MTD, its all been introduced on a drip, drip basis.

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05th Mar 2018 11:02

Love the way HMRC is quick on the penalties for lateness, non-compliance etc. Shame it doesn't work both ways, I could make a fortune out of the time it takes for them to respond to even basic enquiries. I can see this whole MTD being a shambolic mess, even though I get the idea of what they're trying to do I think it's being rushed through half-arsed and as such is a disaster waiting to happen and of course we'll all pick up the bill for it. Whereas whoever's in charge will pick up a gong, no doubt...

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By Randrex
05th Mar 2018 11:14

As a one modest property, retired, landlord (a downsizing property for when the time comes) the MTD process sounds like it will be a nightmare enough without the indicated, and unnecessarily complex, penalty regime - all from a Government that declared it wanted to reduce red tape! At a guess the reporting deadlines will be similar to those for VAT - doing those returns on time when working full time and travelling was sometimes very difficult - does a retired landlord now have to schedule times away from home (I try to be away from the internet too!) to avoid reporting periods? Ridiculous!! - and they'll never have time to look at most of the data. They should at least raise the exempt turnover to £25k or £30k which would take out most unintentional landlords and people like me who are hardly key drivers of tax revenue (but pay what is due on, or before, time due).

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to Randrex
05th Mar 2018 12:08

Is the income from your single property more than £10k p.a.? If not you are below the threshold.
"Individuals in employment and pensioners will not have to use the digital service unless they have secondary incomes of more than £10,000 per year from self-employment or property."
https://www.gov.uk/government/publications/digital-reporting-and-record-...
My wife and I sold one of our B2L properties to stay below the threshold and put the money towards an ocean-going boat. Much more fun, haven't regretted it for a moment, and we joke that if it all gets too much we'll just sail away.

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to C.Y.Nical
05th Mar 2018 12:20

Is it a Monitor Type Dhow. Come on the suns shining, the birds are singing, I've got rid of my cold.

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By tedbuck
05th Mar 2018 11:32

You are all wasting your time - the software suppliers are such good salesmen that HMRC is butterballed into believing everything they say.

Self assessment still doesn't function 100% accurately (about 20 years on), RTI doesn't do what it was said to do and still loses payments and HMRC cannot supply or will not supply detailed information.

Automatic coding adjustments are absolute rubbish where it actually matters.

VAT actually does seem to work but the penalties are obscene.

And if you need to speak to a human being in HMRC you have to listen to 5 minutes nonsense from HMRC's computers and then stand a 50:50 chance of waiting ages and being cut off.

And this is the organisation which will run MTD.

Isn't there some expression about Breweries which fits the case?

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to tedbuck
05th Mar 2018 18:47

Is it coincidence that the VAT system was designed by HMCE whereas all the digital applications for the other taxes, and that are being lamented on ACW, are the fruits of IR/HMRC?

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05th Mar 2018 11:40

Great Article. Me sees liquidations galore. I bet C/E won't like their "customers" being messed about with.
As a point in principle why should there be a surcharge on late payment as wells as interest. If a business can't pay the bill (cos that's the case 99% of the time) then why add to it There could come a time when the business folds because of the system. Maybe that's what HMRC want. So looks like the money we save on the EU will be going to cover the dole queue.

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05th Mar 2018 12:50

what do you think was going to close the 'tax gap'....it was always about penalties. The Revenue are no longer interested in people paying the correct amount of tax....there is no growth in that area....

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to justsotax
05th Mar 2018 13:08

"tax gap" is that like a pot hole that however many times you fill it, it reappears.

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05th Mar 2018 14:04

Are people of the opinion that MTD is still going ahead then?

Is there any evidence of this?

The proposal for VAT are virtually nothing to do with MTD.

It simply transfer the existing numbers to HMRC in a different format using third party software not the free version.

It does nothing at all for any other data, and it certainly doesn't provide data that could be used to complete a tax return

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to ireallyshouldknowthisbut
05th Mar 2018 14:24

If the figures on the new VAT update work then it's a simple process to get under £85k business to follow on using similar software (or so we are led to believe).
Don't forget HMRC are doing away with the tax returns as we know them Jim.
MTD is the whole format of how HMRC interacts with business and agents in the future.
"In a Galaxy far, far away the HMRC are preparing the MTD star to obliterate small business" Can the blue print which shows the weakness be leaked to the agents in time to stop this madness. Coming soon at an Accountants office near you.

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05th Mar 2018 17:05

I am still on track for offering a very cost-effective solution to all of this, which I call MTU.

Making Tax Up.

It will comply 100% with the requirements, I'll probably use Quickbooks. It will be cheap. It will get past all the HMRC QA checks.

If I could get the odd £10m adjustment past the auditors in my days in industry - and I could - then this will be a stroll in the park.

Job done on the stupid HMRC drivel, now let's get back to doing proper accountancy and tax work.

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05th Mar 2018 18:29

As someone who specialises in individual taxpayers and small businesses, the whole MTD saga threatens to be just one more administrative pain.

I will be truly gobsmacked if the system runs anything like smoothly from the get go, or that it starts as planned next year.

I know it keeps me in gainful employment but really we could all do with fewer changes and clearer less cumbersome tax systems.

I live in hope that my pessimism and scepticism about MTD is proved wrong.

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05th Mar 2018 20:00

Treasury and Government enacted precisely similar penalty provisions, if you remember, for full-blown MTDfb BEFORE they had actually worked out the modalities.

As I have stated oft before, the vast majority of SMEs are sole traders and most are computer illiterate, functionally illiterate and innumerate: thanks to failed Government-led "Education". Thus they will be compelled to seek assistance from professional advisers; whom they simply cannot afford.

The net result, I forecast, will be increasing numbers of small traders working "On the Black".

Their customers, mainly, non-business people, will be happy to save 20% of parts and labour.

Government simply fail to realise what a bloody mess the economy on Main Street is in: they seem to believe all those self-employed are the same as the bloated rip-off artists such as Carillion et al.

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06th Mar 2018 09:31

I am getting sick of penalties, especially the automatic ones. Bank directors can destroy a countries wealth and they get away with it. Carillion directors can cook the books and get away with it, HMRC can make plenty mistakes and get away with it etc. etc.
but us the poor sods at the bottom get a penalty for almost everything. Next it will be for breathing too loud.

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By tedbuck
06th Mar 2018 10:29

Of course the culture change has a lot to do with the hubris of both government and HMRC. They are mostly without experience of the real world and have lost sight of what they are which is public servants.

Perhaps we should go back to them signing off as
"Your humble, obedient servant," I bet that would enrage all the equallists and hashtag nitwits but it might, just might, remind both HMRC and Politicians of what they are supposed to be, which is, of course, public servants. Politicians in particular seem to have completely overlooked this!

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06th Mar 2018 14:10

Sooo they don't know how it will work, don't have software that actually works for a trial, admit they have concerns about the ability of their systems to process the data once they do have working software but know what they are looking to get in in the way of fines and penalties! Yep that sounds like HMRC!

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By djtax
06th Mar 2018 14:35

Not all small business people are suited to using formal accounting software - it can be a big learning curve for some. Anyway HMRC are supposedly committed to accepting some form of 'bridging/enabling' software to allow a (very large) number of small businesses to continue using Excel spreadsheets for their main records, so we should not have to force them onto new systems eg QB, Sage, Xero etc. Only problem is the 'bridging' software does not yet exist...yet HMRC are telling us we can all join the MTD for VAT trial in four weeks time so we will all be fully conversant by the time it becomes compulsory (for VAT over £85K etc) in a year's time.....

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By 625VA
23rd Mar 2018 21:26

We all know how poor HMRC are and that they can take a year or more to reply to practitioners - we have written evidence of this. However, I think the REAL problem is the weak, insipid individuals who claim to lead the professions we pay handsome subscriptions to. They claim to put their members case to HMRC in the "Working Together" otherwise known as "HMRC Dictating Policies", but really they are useless liabilities who can do no better than to pose for stupid photographs. We should all get together and march on the Houses of Parliament - it can work for other causes. As for the accounting and tax profession members - we only have ourselves to blame for the weak kneed Institute members we allow to represent our professions.

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