Making Tax Digital & Compliance Checks

HMRC previously published some guidance “Compliance Checks” on 31st May 2022 in relation to Making Tax Digital (MTD) and penalties.

It is now notable that, whilst penalties have always existed historically for MTD, it is the first time HMRC have published them under the one heading of MTD compliance.

It suggests that HMRC will look to apply these penalties in the future. Since MTD was introduced, there has been a soft-landing period and taxpayers may have grown accustomed to the laissez faire approach from HMRC.

Penalty Type 1

VAT returns must be filed using “functional compatible software.”  This means software or a set of software programmes, products or apps that can record and store digital records (see below as to the definitions of digital records), that can provide HMRC with the information held digitally within those records and can allow HMRC to access that information.

As well as the raft of cloud-based software out there such as QuickBooks, it can also include desktop software such as SAP and Navision as well as any bespoke software that meets the requirements.

API enabled spreadsheets are also recognised as “compatible functional software,” so the option to record sales and purchases in non-functional software can still be met by using an API enabled spreadsheet that allows the data to be transmitted to HMRC.

There are many types of API enabled spreadsheets in the marketplace, some are free, others charge a modest fee with versions targeted at an individual business or at accounting practices submitting many VAT returns on behalf of clients.

HMRC states that where VAT returns are not filed using functional compatible software, there will be a penalty of £400 for each return filed. The penalty is subject to appeal and review.

Penalty Type 2

MTD requires the business to keep some records digitally. These records are: –

  • your business name, address, and VAT registration number
  • any adjustments made outside the software (such as partial exemption)
  • the VAT on goods and services you supplied (all your sales)
  • the VAT on goods and services you received (all your purchases)
  • the ‘time of supply’ and ‘value of supply’ (sales and purchases)
  • the rate of VAT charged

The above must be recorded as entries within a spreadsheet or within the cloud software, you do not have to scan the documents/invoice, although some apps can scan an invoice and enter it into the accounts automatically.

Where the above records are not kept digitally, HMRC can charge a penalty of between £5 to £15 per DAY, for every day the above records are not compliant.

Penalty Type 3

Finally, where a business transfers digital records between software programmes or various sources, that data must be digitally linked. For example, a business uses bespoke software to record sales. That software is not MTD compliant and so the business downloads the data as a .txt or .csv file.

That .txt file is then imported into compatible software, say an API enabled spreadsheet. Before filing the return, an error is found in the sale data (maybe a wrong VAT rate), the business cannot amend the entry in the spreadsheet as that would break the link between the bespoke sales software (which hasn’t been amended) and the spreadsheet (which has been amended), the business would need to correct the error in the bespoke software first, then export the data again and then import it into the spreadsheet, as then the data is correct at source and in the spreadsheet.

It is ok to email an Excel a spreadsheet and the recipient to import that data into cloud software or into an API enabled spreadsheet in order to file the return. Where there is no digital link, where data has just been cut and pasted or similar infringements, then a penalty can apply.

Similarly, HMRC can apply a penalty of between £5 to £15 per day, for every day in which data does not meet the requirements of MTD.


Whether or not HMRC have the resources or time to pursue the above, is questionable, but HMRC continue to inspect businesses and query unusual (refund) returns and it is these pressure points where a business exposes itself to a risk of further enquiry from HMRC.

If there are businesses out there still struggling with MTD or who are being a bit relaxed about digital links or cutting and pasting on the basis there is nothing that HMRC can do, should think twice, the fact HMRC are reminding taxpayers of their MTD obligations, now suggests a future that we can all foresee.

Get in touch

Should you have any questions or require advice or further information relating to tax compliance matters or submission of your vat registrations or returns contact our vat experts. Or for further information relating to MTD matters and cloud computing options, book a free consultation with one of our Cloud computing or MTD experts. Our experts will help you to decipher through the jargon and advise you on the best options from the numerous software providers. They will assist you in setting up compliant, efficient and easy processes, for your vat registration and tax returns, ensuring that you meet all HMRC requirements and deadlines, avoiding any penalties.

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