Guide to Making Tax Digital penalties

You may already know about Making Tax Digital (MTD) for Income Tax and VAT. 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, and updated at various points since. Those who fail to provide VAT returns and Self Assessments on time will be affected by the new late submission penalties.

Under the new rules, if you fail to meet a submission deadline, you may not be automatically penalised. This translates into a points-based penalty system that is designed to penalise offenders proportionately, rather than for genuine mistakes. 

Read on to discover how this points system works and how MTD makes it easier to submit your VAT returns on time.

Key Takeaways

Points-based penalty system - HMRC uses a points-based system for late submissions. Missing deadlines results in penalty points, which accumulate until it hits a threshold, which triggers a £200 fine. Points are accrued separately for VAT and Self Assessment submissions.

Points thresholds - 2 points for annual submissions (VAT and/or Income Tax), 4 for quarterly (VAT and/or Income Tax), and 5 for monthly (VAT only). 

Separate penalties accrue for VAT and Income Tax - Businesses filing both VAT and Income Tax returns risk separate penalties for missed deadlines.

Late payment penalties - If tax is paid within 15 days of the due date, no penalty will be payable. Payments overdue by more than 15 days incur fines starting at 3% (2% before April 2025), increasing to 6% after 30 days (4% before April 2025).

No penalty will be payable if the tax is paid within 15 days of the due date. 

Tax unpaid after day 15 will attract a 3% (2% before 1 April 2025) penalty. 

Where tax remains unpaid by day 30, the penalty increases to 6% (4% before 1 April 2025).

Appealing Penalties - You can appeal penalty points and fines if you have a reasonable excuse, but compliance is critical to avoid them.

Key Dates:

• MTD for VAT: Fully implemented in April 2022.

• MTD for Income Tax: 

• Currently in effect for those in the pilot. There is an exemption from penalties for the late filing of quarterly updates while  in the pilot.

• Effective from April 2026 (for businesses with annual income over £50,000)

• Effective from April 2027 (for businesses with annual income over £30,000)

• Effective from April 2028 (for businesses with annual income over £20,000)

It includes Self-employed businesses and landlords with annual business or property income above £50,000 from April 2026, £30,000 or more from April 2027 and £20,000 or more from April 2028.

Compliance Is Essential - Businesses and their tax agents must adhere to MTD regulations to avoid penalties and stay competitive.

How does the points system work?

An individual or business will get a penalty point every time they miss a MTD for VAT or MTD for Income Tax 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, with the threshold depending on how frequently submissions are filed.

• 2 point threshold for annual submissions

• 4 point threshold for quarterly submissions

• 5 point threshold for monthly submissions (not relevant for MTD for IT)

Once the points threshold is reached, HMRC will charge additional penalties for every deadline that is missed. 

From April 2025, all Self Assessment taxpayers are required to follow MTD requirements, significantly broadening the scope of who must comply. 

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.

Compliance Periods for 2025: To remove penalty points, businesses must meet all submission deadlines for:

• 2 compliant submissions for annual submissions (two years)

• 4 compliant submissions for quarterly submissions (one year)

• 6 compliant submissions for monthly submissions (not relevant for MTD for IT)

These businesses must also have caught up with any prior deadlines.

What are late payment penalties?

HMRC also has 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.

HMRC's late payment penalties are designed to encourage prompt payment of tax liabilities. The VAT penalties increase the longer the payment remains overdue, as follows:

• Within 15 days: No penalty will be applied if the payment is made within this timeframe.

• 15 to 30 days overdue: A 3% penalty is charged on the outstanding amount as of day 15.  If not paid by day 30, a 3% penalty is charged on the outstanding amount as of day 30.

• 31 days or more overdue: An additional penalty is charged at a rate of 6% of the outstanding balance, applied daily until the payment is settled.

If a Time to Pay (TTP) agreement is reached with HMRC, the penalty accrual will stop, providing a reprieve for businesses facing financial difficulties. This flexibility is critical for businesses struggling to meet their obligations while avoiding mounting penalties.

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.

Implementation dates for penalty rules

The late submission and late payment penalties follow a phased implementation schedule:

• VAT: Applicable to VAT accounting periods starting on or after 1 January 2023.

• Income Tax (IT): From 6 April 2026 for taxpayers mandated to join MTD for IT from that date.

Understanding these dates is essential for businesses to prepare for compliance and avoid unnecessary penalties.

When will the points system start?

The penalty system currently applies to submissions from 1 January 2023, following the final rollout of MTD for VAT in April 2022. These penalties will extended to MTD for Income Tax from April 2026.

Who will penalties apply to?

Starting April 2026, MTD compliance is mandatory for all Self Assessment taxpayers (including sole traders, landlords, and freelancers) with an income over £50,000. This will be rolled out different self-employed income levels in the coming years (£30,000 from April 2027, £20,000 from April 2028). Businesses and individuals must ensure they follow the digital filing requirements to avoid penalties.

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.

Reasonable excuses for appeals process

HMRC recognises that unforeseen circumstances can lead to missed deadlines. If you have a reasonable excuse, such as severe illness or IT system failure, HMRC may waive penalty points or fines.

To appeal a penalty or point, you must:

• Provide evidence of your reasonable excuse.

• Participate in an interview with HMRC if required.

• Escalate the matter to the First Tier Tax Tribunal if the outcome remains unsatisfactory.

A proactive approach to resolving disputes with HMRC can help businesses minimize the impact of penalties.

The importance of compliance

Non-compliance with MTD regulations can lead to financial penalties and reputational damage. As penalties become more structured and automated, businesses must adapt to meet the requirements. Compliance not only helps avoid fines but also supports accurate and timely tax reporting, reducing the risk of audits and additional scrutiny.

By understanding these details, businesses can better navigate the MTD framework, meet their obligations, and avoid the financial and administrative burden of penalties.

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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