Chancellor Philip Hammond has said that businesses that are "doing their best to comply" with Making Tax Digital will not be penalised if they inadvertently breach VAT filing or record-keeping rules in the first year.
Making Tax Digital (MTD) comes into force from 1 April and makes it mandatory for businesses over the VAT threshold (with a turnover over £85,000) to use approved apps to keep VAT records and file returns.
Philip Hammond also said that Making Tax Digital will not become mandatory for other taxes or businesses in 2020 as had been planned. Instead, the roll-out beyond VAT will not happen until 2021 at the earliest.
The Written Ministerial Statement, published to support last week's Spring Statement, said: "The government can confirm a light touch approach to penalties in the first year of implementation. Where businesses are doing their best to comply, no filing or record keeping penalties will be issued. The focus will be on supporting businesses to transition and the government will therefore not be mandating MTD for any new taxes or businesses in 2020."
Responding to the statement, Mike Cherry, national chairman of the Federation of Small Businesses (FSB), said: "It's good to see the government offering a reprieve on this front, going further in its commitment to light touch enforcement of Making Tax Digital, following our warnings about the costs of rule changes. This commitment must be honoured. It should also be extended if unexpected issues with the new system arise.
"Equally, extending the freeze on further roll-out of MTD from 2020 to 2021 is a welcome move. The government should now rule out extension of MTD to firms below the VAT threshold until the end of this parliament at the earliest, in 2022. A full review of the roll-out will be needed in the months ahead."
The British Chambers of Commerce (BCC) has recently warned that many businesses are still not prepared for Making Tax Digital for VAT. Suren Thiru, BCC head of economics, said: "Our Chamber research shows that with only a matter of weeks to go there still isn't sufficient understanding or preparation among businesses to make its roll-out a success right now."
However, Theresa Middleton, HMRC director for the Making Tax Digital Programme, said: "Our VAT pilot service is progressing well, with over 46,000 businesses in the pilot and over 200 MTD compatible software products available, including some free products, and over 140 existing subscription products being updated at no cost at all."
Written by Rachel Miller.