Neil Warren reveals how a small business adopting new software to comply with MTD for VAT made £19,000 of VAT errors on its first MTD return.
I had a bet with myself as to when I would get my first VAT query from an accountant where a client had made a mess of a VAT return submitted under MTD. I expected to have received at least one horror story by the end of April, relating to the March VAT period which many businesses had signed up to submit as part of the MTD pilot scheme.
However, I lost my bet – the first horror tale did not arrive until 16 May.
The client had upgraded to new software to comply with MTD and was enthusiastic about its apparent simplicity: “I only have to press a button,” he said, “and the VAT return goes to HMRC without me having to do anything at all. It’s incredible.”
The problem was that the new software was set up to calculate the client’s VAT return based on the cash accounting scheme, but the client had always calculated his returns based on an invoice basis. He didn’t spot the problem when submitting the VAT return. It only came to light a couple of weeks later. What did this mean in practice?
The client had made the following errors:
Output tax had been duplicated on sales debtors at the end of December 2018, ie where output tax had already been included on that return and was therefore paid again on the March return when the customers paid their bills.
The same problem occurred with input tax, a duplication of input tax.
Output tax had not been paid on unpaid sales invoices at the end of March 2019, or input tax claimed on unpaid purchase invoices.
The errors with the final bullet point were not an issue if the client adopted the cash accounting scheme (which he was eligible to do), but the first two bullet points were errors which had to be corrected.
The business had overpaid output tax by £14,000 and overclaimed input tax by £5,000, ie total VAT errors of £19,000 had been made, with a net overpayment of £9,000.
The good news is that because this net error is less than £10,000, it can be included on the next return as an error correction for the period to 30 June 2019. Alternatively, form VAT652 could be submitted to HMRC to correct the errors, and that may speed up the repayment process.
However, the accountant’s main concern was that HMRC might treat the duplicated input tax claim as a ‘careless error’ and raise a penalty in the future if it was corrected on the June VAT return. Should the client still complete form VAT652 and tick the box to say that the error has been corrected on a return, so giving full disclosure for penalty purposes?
My advice to the accountant was to not worry about penalties in this scenario: the issue has been caused by a software problem, and not careless behaviour by the taxpayer, illustrated by the fact that he had overpaid VAT overall. Although HMRC has said that MTD will not change its policy or process on inaccuracies in VAT returns, the taxpayer in this instance should have a reasonable excuse for the error. However, the mistake does need to be promptly corrected after it was discovered.
HMRC has said that it will adopt a light touch or “soft-landing” for penalties relating to the digital links for the transfer or exchange of information between software programs. This soft-landing will apply for the first 12 months after MTD becomes compulsory, so until April 2020 for businesses who must comply from April 2019, and until October 2020 for a business who must comply with MTD from October 2019.
All tax or accounting software has to be set up with proper parameters, and that did not happen here. Perhaps encourage clients to pay you a bit extra to review their first VAT returns submitted under MTD, if new software is involved.
Any errors found as a result of MTD issues should be dealt with as soon as possible, per VAT Notice 700/45.
This story confirms the fears of many advisers that MTD may increase rather than reduce VAT errors, at least in the short term until the system has bedded down.