Making Tax Digital (MTD) has been a big topic over the past few years, and HMRC are now encouraging compliance by issuing penalties.

CC/FS69 details several published penalties HMRC are looking to start applying to those that are not compliant with MTD’s rules. The need to move towards MTD has had a soft-landing period for taxpayers, however given that MTD has been known to many business owners during this time, HMRC are now looking to encourage compliance.

Penalty 1 – Not storing records digitally

MTD requires businesses to store records digitally, being, but not limited to:- the business name, VAT registration number, adjustments made outside the software – such as partial exemption, rate of VAT, etc.

These must ideally be recorded within cloud-based software, or a spreadsheet. Where these records are not stored digitally, a penalty of between £5-£15 for each day of non-compliance can be issued.

Penalty 2 – Not using compatible software

“Functional compatible software” must be used to file VAT returns, i.e. software must record and store records digitally. This allows HMRC to access and receive information in a digital format.

HMRC will look to issue a penalty of £400 per return that has not been filed through functional compatible software.

Penalty 3 – Not transferring data digitally through a digital link

Data transferred from one piece of software to another must be digitally linked. For example, if a .txt file is being imported onto compatible software, this must be on an API (Application Programming Interface)-enabled spreadsheet.

Non-compliance could lead to a penalty of between £5-£15 for each day.

Penalty 4 – Incorrect filing

If a VAT registered entity fails to file a VAT return using MTD software, penalties for incorrect filing can be issued. These are scaled according to the annual VAT exclusive turnover of the business.

Annual turnover


£22,800,001 and above

£ 400

£5,600,001 to £22,800,000


£100,001 to £5,600,000


£100,000 and under


Penalty 5 – Filing a VAT return late

Penalties for filing a VAT return late or paying the VAT late have been applied through default surcharges. This will continue to apply to returns and payments until at least 2023.

This is something to particularly watch out for as penalties can often reach up to 15% of the VAT due.


Our chosen software is Xero for cloud-based accounting due to the functionality it has with several different apps, APIs and it is approved by HMRC. We are working with many clients to transition successfully to MTD, which is helping them run their business more efficiently, whilst getting a better understanding of their potential VAT liability in advance.

If you are looking to transition to cloud-based accounting, schedule a free consultation with my colleague, Mike Black, Head of Professional Services.

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