The dangers of gaps and inaccuracies when filing digital tax returns

The way that we track, report and pay our taxes is changing. Just as more and more of our lives and activities are taking place online, from shopping to banking and work, our tax affairs are also moving into the digital realm. Making Tax Digital (MTD) is the UK Government’s flagship initiative to take tax online and it’s set to affect us all.

What is MTD?

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MTD is a fundamental change to the way that the tax system works. HMRC says that MTD is the focus of its ambition to become one of the “most digitally advanced tax administrations in the world”, making our tax system more effective, more efficient and easier for taxpayers of all kinds to get their tax reporting right.

Whether we’re earning money through self-employment, investments, a small business or any other circumstances, it’s important to record and report tax accurately. Beyond any ethical considerations (and many people have mixed feelings about the levels and ultimate destination of their taxes), you could be penalised for providing inaccurate or incomplete information.

When will MTD penalties apply?

The current system of HMRC penalties for errors in tax returns and other documents has been in place for more than a decade now. It was introduced in April 2009 and the scope widened a year later. Taxpayers could be penalised if tax returns or other documents were inaccurate, leading to tax being unpaid, understated, over-claimed or under-assessed.

As the tax system is migrated online under MTD, the penalty system is also changing to keep pace. The penalty system for MTD for VAT was originally supposed to have started by now but was moved back when it became clear that HMRC’s IT systems would not be ready in time. This is now due to start at the beginning of 2023, followed by a similar system for MTD for Income Tax in April 2024 and for all Self-Assessment taxpayers from April 2025.

It’s worth noting that the new penalty system will apply to Self-Assessment taxpayers even if they don’t use MTD.

What are the likely penalties for providing missing or inaccurate information?

One of the biggest differences between the current tax reporting regime and MTD is that you will have a ‘regular obligation’ to provide quarterly updates. Under the new Making Tax Digital penalties, you can receive ‘penalty points’ if you miss your submission deadline. This is similar to the way that speeding fines work. When you reach a certain threshold of points, a £200 penalty is automatically applied. There will also be a new penalty system for late payments.

If you make your submissions on time and they contain inaccuracies, however, this will still be covered by the existing system. Penalties can be applied depending on the reasons for the error and the potential lost revenue to HMRC. If it’s deemed to be due to a lack of care, for example, the penalty will be between 0% and 30% of the extra tax due. If it is seen as deliberate, this can rise to 20% to 70%, and if it is deliberate and concealed, the penalty can range from 30% to 100% of the extra tax due.

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