Intuit QuickBooks Small Business Index, December 2024
MAKING TAX DIGITAL (MTD)
The penalties for not complying with Making Tax Digital regulations
If you’re an accountant, you should already know about Making Tax Digital (MTD). What you may not be aware of is how HMRC will police it and how it will apply fines for late filing.
HMRC will follow a points-based penalty system for late submissions and payments under the new Making Tax Digital regulations. This system offers a chance to businesses while encouraging them to file submissions on time.
This penalty process was confirmed by draft legislation of the 2018-2019 Finance Bill. It will penalise any business that files monthly, quarterly or annual returns late - or neglect to file them at all. Read on to discover how this points system works and how MTD makes it easier to submit your VAT returns on time.
How will the points system work?
An individual or business will get a penalty point every time they miss a deadline. When the individual or business reaches a certain threshold of points, HMRC will issue an automatic £200 charge.
Businesses will be notified of any points issued their way and the threshold depends on how frequently submissions are filed.
2 point threshold for annual submissions
4 point threshold for quarterly submissions
5 point threshold for monthly submissions
Once the points threshold is reached, HMRC will charge additional penalties for every deadline that is missed.
There are separate point systems for VAT and Income Tax, so businesses run the risk of facing separate penalty charges. So, if you’re filing a VAT Return and MTD for Income Tax on the same day, but miss the deadline, you could be facing two £200 penalty fines.
These points aim to encourage businesses and individuals to file on time, so HMRC will not issue more than a single point for missed deadlines of the same submission.
For example, if an individual with three registered businesses misses the deadline for monthly submissions for all three businesses, they will only receive one penalty point under the “same submission obligation”.
But, if this same entrepreneur missed a monthly submission for one business, an end of period statement for another business and an Income Tax report for the third business, they will receive three penalty points.
Do penalty points expire?
Penalty points will not be permanent, and expire after two years, starting from the month after the point was received.
However, points will not expire if the business has reached the penalty threshold. For these businesses, a period of good compliance must take place in order to remove the points.
A period of good compliance means that the business meets all submission deadlines over a set period of time:
2 compliant submissions for annual submissions (two years)
4 compliant submissions for quarterly submissions (one year)
6 compliant submissions for monthly submissions
These businesses must also have caught up with any prior deadlines.
What are late payment penalties?
HMRC is also introducing late payment penalties to go alongside the late submission penalty system.
Those facing late payment penalties will be automatically charged according to how late the payment is and the fines are based on a percentage of the payment.
Within 15 days after payment deadline - no penalty
16 - 30 days after payment deadline - 2% of the payment amount
Day 31 after payment deadline - 2% of what was due on day 15, plus 2% of what was due on day 30
After 31 days - 4% of the outstanding amount, applied daily
If you miss a payment, you’ll be subject to a monthly surcharge on each VAT payment you make over the following year. This surcharge depends on how many VAT payments you’ve previously missed.
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 points or penalties?
It will be possible to appeal against penalty points and actual penalties, at the discretion of HMRC and in line with “published guidance”.
To appeal- any point or penalty successfully, you will need to have a reasonable excuse for failing to meet a filing obligation.
There will also be an interview with HMRC as the first step of the appeal process, which will then progress to the First Tier Tax Tribunal if the outcome is not satisfactory.
When will the points system start?
The penalty system will apply to all submissions from 1 January, 2023, following the final rollout of MTD for VAT on April 1 2022.
These penalties will extend to cover MTD for Income Tax when it rolls out in April 2024.
MTD will apply to all Self Assessment taxpayers as of April 2025, even if they don’t use MTD for Income Tax.
Who will penalties apply to?
HMRC will issue penalties for non-compliant individuals and businesses, rather than their tax agents. Businesses will want to know that their tax agent is compliant with Making Tax Digital regulations, because this will reduce the risk that they’ll end up with a penalty.
As a tax agent, if you fail to submit your clients’ accounts in a compliant way, you won’t be penalised by HMRC, but there’s a risk that you could lose clients. Firms that are clued up and can offer a fully compliant digital filing service will pick up clients from accountants who lag behind.
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 HMRC website.
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