The penalties for not complying with the UK’s Making Tax Digital regulations

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Not sure about the penalties for Making Tax Digital regulations? Find out what they are and how to avoid them in this short summary of the HMRC proposal.

Any business that fails to comply with the new MTD regulations, or submits their tax returns late, will be subject to a points-based penalty system, created by HMRC after a consultation process which ended in 2017. 

This revised penalty process was confirmed by draft legislation of the 2018-2019 Finance Bill. It will penalise any business who file their monthly, quarterly or annual returns late, or neglect to file them at all. Read on to learn more about the consequences of racking up too many points, and how MTD makes it easier to submit your business VAT returns on time.

The soft landing period for MTD for VAT

By providing businesses with a so-called soft landing period for moving to the MTD system, HMRC has created a buffer to allow for any teething problems people may have with getting started. The most important thing for companies to put in place is their “digital links”, which connects the MTD-regulated software on which they have chosen to store their accounts with HMRC’s system.

However, in the wake of the Coronavirus pandemic, HMRC has promised to take a “light touch” approach towards these penalties during the soft landing period. Simply put, if your business is generally following the rules, but has made the occasional error in keeping accurate records, you won’t incur any penalty points for the first year. That said, anyone who pays or files their VAT returns late will not be afforded the same light touch, and will still incur the full penalty system.

How does the penalty points system for VAT work?

An individual or business will receive one penalty point for every time they fail to digitally submit their accounts on time. When the individual or business reaches a certain threshold of points, HMRC charges them a penalty.

The points threshold to incur a penalty depends on how frequently they are required to submit their returns:

  • 2 point threshold for annual submissions

  • 4 point threshold for quarterly submissions

  • 5 point threshold for monthly submissions

Once the threshold has been reached, HMRC will then charge a penalty for every subsequent submission failure.

How long do penalty points last?

Much like those on your driver’s license, your MTD penalty points are not permanent, and will expire after a period of good compliance. HMRC has defined these periods of good compliance as:

  • 2 compliant submissions for annual submissions

  • 4 compliant submissions for quarterly submissions

  • 6 compliant submissions for monthly submissions

VAT penalties for late payments

As we pointed out earlier, as long as your business has been on its best behaviour, you’ll be awarded a soft touch for the first year of MTD being in place. However, if you miss a payment, you will still be subject to a monthly surcharge on each subsequent VAT payment you make over the following year. The cost of this surcharge will correspond to how many VAT payments you have previously missed, and increase or decrease accordingly.

The surcharges will be priced as follows:

Number of defaults across a twelve-month period Percentage of surcharge for yearly turnover below £150,000 Percentage of surcharge for yearly turnover above £150,000
1 N/A N/A
2 N/A 2% (if this amounts to more than £400)
3 2% (if this amounts to more than £400) 5% (if this amounts to more than £400)
4 5% (if this amounts to more than £400) 10% or £30 (depending on which is higher)
5 10% or £30 (depending on which is higher) 15% or £30 (depending on which is higher)
6+ 15% or £30 (depending on which is higher) 15% or £30 (depending on which is higher)

Can you appeal against MTD penalties?

It’s possible to appeal against MTD penalty points and actual penalties. HMRC anticipates a significant number of appeals, especially in the initial rollout stage of the software, so the process will probably be automated. To appeal successfully, you need to claim a reasonable excuse for failing to meet your filing obligation.

When will the new MTD penalties come into effect?

Initially, the new points-based system was to apply for accounting periods commencing April 2020, giving businesses and their agents time to understand and apply the new system. However, as noted above, the end of the soft landing period has now been pushed back by a year to April 2021.

Who do MTD penalties apply to?

HMRC will impose penalties for non-compliant individuals and businesses, rather than their tax agents. Check that your tax agent is compliant with the Making Tax Digital regulations, or you could end up with a penalty. If your tax agent isn’t compliant, consider switching agents or prepare to submit your VAT yourself.

Where can I find out more information?

You can find all the details of the consultation outcome Making Tax Digital: sanctions for late submission and late payment on the Government website.

This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.

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Crypto taxes: How to pay taxes on cryptocurrency

Crypto taxes 2021: How to pay taxes on cryptocurrency

Over the past decade, cryptocurrency has slowly but surely become one of the hottest investments on the market. While many people were initially skeptical of crypto’s staying power and appeal, the rise of cryptos like Bitcoin has caught the attention of an increasing number of investors. But the IRS is also homing in on crypto taxes—and it’s important that investors know the basics regarding how to file and how to pay taxes on cryptocurrency.

Unfortunately, the IRS doesn’t exactly make it easy to understand how to calculate crypto investors’ tax liability, so a lot of the responsibility to get it right lands on the individual investor. 

Of the 6 things to know before investing in crypto, the fact that crypto is taxed is right up there on the list. Read on to learn all you need to know about crypto taxes, including how to file and pay taxes on cryptocurrency.

Related: Guide to taxes and cryptocurrency

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There are many rules and regulations governing crypto, but the most basic thing to understand is that crypto investors are required to report their holdings and gains to the IRS when they file their taxes.

The IRS views cryptocurrencies (which it refers to as “virtual currencies”) as property. Not currency. And because of that, Uncle Sam wants to know what you’re holding, and many crypto holders will have tax liabilities . PDF Fileassociated with their holdings.

As they would with any other property they might own, crypto holders who purchased crypto like a stock or other asset will need to keep track of their crypto transactions. They’ll also need to report the value of their holdings (in U.S. dollars) on their tax filings.

One caveat: cryptocurrency received as a gift or a transaction, or that is mined, is instead treated as income by the IRS, and taxed accordingly.

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In many ways, investing in cryptocurrencies like Bitcoin is similar to investing in other assets, like stocks or bonds. Likewise, taxes are determined in similar ways.

For instance, when an investor buys and later sells a stock, they have a tax liability on their realized gains. They made money, or income, from the sale, and now owe taxes against that income. It’s a similar situation when it comes to tax on cryptocurrency.

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Here are some situations in which crypto investors will generate a tax liability on their holdings:

  • Cryptocurrency is sold for cash: If you made a profit, that’s a capital gain. Depending on how long you held the crypto before selling, it would either be a short-term or long-term capital gain.
  • Cryptocurrency is used to purchase a good or service: Technically, here you are selling your crypto for dollars, then using the dollars to pay for a good or service. In the selling, capital gains taxes may apply.
  • Converting one cryptocurrency to another (exchanging cryptos): Converting or exchanging one crypto for another is selling the one to purchase the other. As a result, you may have to pay tax on the sale of the first crypto.
  • Being paid by an employer in cryptocurrency: Even if you get paid in crypto, it will get taxed as income.
  • Mining cryptocurrency: Proceeds from mining are typically taxed as income. It’s also possible for some miners to be taxed as a business.
  • Crypto is acquired via an “airdrop” or “hard fork”: In the event of a hard fork that results in new coins, those new coins are taxed as income.

Make no mistake about it, if a return is generated—positive or negative—or some type of income is realized from holdings, your crypto will need to be reported to the IRS. This is why it’s important to keep track of any and all crypto transactions.

Many crypto exchanges will keep track of an investor’s transaction history (like a brokerage would with stocks). But it’s not a bad idea to make individual notes, too. Or, if you’re not quite sure what to do, consult a professional.

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When it comes to filing and paying taxes on cryptocurrency, here are the steps that should be taken.

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Reference the list of above to check if any of your transactions may have generated a tax liability. If so, it’s likely you’ll have a return to report to the IRS.

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These will need to be reported on your tax return (your exchange can likely provide these in a document for you.) This is a paper trail for the IRS to follow.

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The IRS requires specific forms depending on the activity an individual has conducted with their crypto. That could include making calculations on Form 8949 and then reporting the results on Schedule D of Form 1040 , which outlines and summarizes capital gains or losses. Or, Form 1099-MISC , which is used to report income from rewards if the amount exceeds $600 for the year.

If you do owe taxes as a result of your crypto investing activity, you can pay the IRS directly. But since crypto taxes can be complicated, don’t be shy about reaching out to a professional for help.

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When it comes to lowering your crypto tax liability, many of the same strategies that are used against traditional investments, like stocks, apply to crypto holdings. Here are a few examples:

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The buy-and-hold strategy is simple: The longer an investor holds on to their crypto, the lower their potential tax bill when they do eventually exchange it for cash. If it was held for a year or longer, then long-term capital gains tax rates apply On the other hand, if the investor sells their crypto after holding it for less than a year, then short-term rates apply

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If a loss is realized on a crypto holding, it can be used to offset the gains made on other holdings. This is called “tax-loss harvesting,” and is a common tactic used to lower tax liabilities on other investments. Investors can use tax-loss harvesting to offset as much as $3,000 in non-investment income.

One thing to keep in mind, though, is that if crypto is somehow stolen or lost, investors are out of luck. They won’t be able to apply the loss against their gains to lower their liability.

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The IRS classifies crypto as property, and property donations are tax-deductible and not subject to capital gains taxes.

Here’s how this might work in an investor’s favor: If an investor bought a Bitcoin for $10,000 and it now has a value of $35,000, they would owe capital gains taxes on that $25,000 gain. By donating it, they can avoid those capital gains taxes and also take a deduction “generally equal to the fair market value of the virtual currency at the time of the donation if you have held the virtual currency for more than one year,” according to the IRS.

Andre Francois on Unsplash

Depending on the circumstances, crypto may be taxed as income, or as property.

Cryptocurrency taxes are very real, as are the consequences of ignoring tax liabilities. There are stiff penalties for people who are caught avoiding or otherwise failing to report investment income.

But by keeping track of your crypto holdings and transactions, managing your cryptocurrency tax liabilities shouldn’t be too difficult. As always, you can and should contact a professional if you feel like you’re in over your head.

Learn more:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.


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