Making Tax Digital penalties: avoid fines with simple steps

Published Wednesday 17 December 2025

Table of contents

• How does the Making Tax Digital penalty system work?
• Making Tax Digital VAT deadlines
• MTD for VAT penalties
• Penalties for late submissions and payments
• Making Tax Digital for Income Tax deadlines
• Making Tax Digital for Income Tax penalties
• How to avoid Making Tax Digital penalties
• Will HMRC waive penalties?
• Get ready for Making Tax Digital with Xero
• FAQs on Making Tax Digital penalties

Key takeaways

• Use MTD-compatible software and keep digital links between all your systems. If you don't, you could face daily penalties.
• Keep track of your penalty points. When you reach your threshold (2 points for annual submissions, 4 for quarterly, or 5 for monthly), you'll get a £200 fine. Each late submission after that means another £200 penalty.
• Submit your VAT returns on time – you have one month and seven days after your VAT period ends. Penalty points stay on your record for two years.
• Get ready for MTD Income Tax, which starts in April 2026. It uses the same points-based penalty system as Making Tax Digital for VAT.

How does the Making Tax Digital penalty system work?

Making Tax Digital uses a points-based penalty system. Think of it like penalty points on a driving licence – you collect points for breaking the rules, and when you reach a certain number, you get fined.

You can get penalty points for three things:

• Missing a deadline: Each time you submit a return late, you get one penalty point
• Not keeping digital records: If you don't keep your business records digitally, HMRC can charge you between £5 and £15 for every day you don't comply
• Not using digital links: If you manually transfer data instead of using digital connections between your systems, you can be charged £5 to £15 for each day

When you reach your penalty threshold, you'll be fined. HMRC will charge you £200 and send you a notification.

Your penalty threshold depends on how often you submit returns:

• Annual submissions: 2 points = £200 penalty
• Quarterly submissions: 4 points = £200 penalty
• Monthly submissions: 5 points = £200 penalty

Once you hit your threshold, you'll pay a £200 fine. If you continue to submit late while at the threshold, you'll pay £200 for each additional late submission.

Making Tax Digital VAT deadlines

You need to submit your VAT return one month and seven days after your VAT period ends. For example, if your VAT period ends on 31 March, your deadline is 7 May.

Most businesses submit VAT returns every three months (quarterly). All VAT-registered businesses have been required to follow MTD rules since April 2022. You can check your submission deadlines by logging into your VAT online account.

Each time you miss a deadline, you'll get one penalty point. Late submissions and late payments are treated separately, so you could get penalty points for both.

MTD for VAT penalties

VAT penalties have two parts:

1. Penalty points for late submissions

• You get one penalty point each time you submit late
• If you submit quarterly, four points will trigger a £200 fine

2. Late payment penalties and interest

• HMRC charges penalties if you pay late
• You'll also pay interest on any unpaid VAT

This is different from the old VAT penalty system. Previously, HMRC recorded a 'default' when you were late. If you got another default within a certain period, you'd enter a surcharge period and have to pay a surcharge based on the VAT you owed.

Penalties for late submissions and payments

Here's how VAT penalties add up:

• When you reach four penalty points: £200 fine
• Each late submission after that: another £200 fine
• Example: If you have four points and then submit two more returns late, you'll pay £600 in total (£200 + £200 + £200)

Late payment penalties work differently. The quicker you pay, the less you'll be charged. Here's how it works:

• Day 1-15: No penalty, but you'll pay interest on the outstanding amount
• Day 16: You'll pay a first penalty of 3% on the unpaid VAT at day 15, plus interest from day 1
• Day 31: You'll pay a second penalty of 3% on any VAT that's still unpaid at day 30, plus interest from day 1
• After day 31: You'll pay a further penalty of 10% per year (charged daily) on any amount that remains unpaid, plus interest from day 1

Example: Let's say you owe £5,000 in VAT. If you pay 20 days late, you'll pay a 3% penalty on £5,000 (£150), plus interest from day 1 (around £22 at current 8% rate). If you wait until day 35, you'll pay the first 3% penalty (£150), plus a second 3% penalty (£150), plus a 10% annual penalty for 4 days (around £5), plus interest on the full amount from day 1 (around £38). That's over £340 in penalties and interest – on top of the £5,000 you already owe.

Making Tax Digital for Income Tax deadlines

Making Tax Digital for Income Tax is being introduced in stages:

• April 2026: Sole traders and landlords with income over £50,000
• April 2027: Sole traders and landlords with income over £30,000
• April 2028: Sole traders and landlords with income over £20,000

You'll need to send quarterly updates. These are cumulative reports that cover the tax year so far. You can adjust figures from previous quarters if needed.

Here are the submission deadlines for each quarter:

• Q1 (6 April – 5 July): due 7 August
• Q2 (6 April – 5 October): due 7 November
• Q3 (6 April – 5 January): due 7 February
• Q4 (6 April – 5 April): due 7 May
• Final declaration: due 31 January

Our guide to HMRC quarterly updates explains these changes in more detail. After you've sent all four quarterly updates, you'll also need to send a Final Declaration by 31 January.

Making Tax Digital for Income Tax penalties

Making Tax Digital for Income Tax uses the same points system as VAT.

Because you'll submit four quarterly updates for MTD for IT, your penalty threshold is four points. This means if you submit late four times, you'll get four penalty points and a £200 fine.

Late payment penalties work the same way as for VAT. HMRC charges interest from day 1 on late payments. Additional penalties kick in at day 16 (first 3% penalty) and day 31 (second 3% penalty, plus daily charges at 10% per annum), continuing until you've paid everything you owe.

You can also be fined for not using compatible software. If you don't use MTD-compatible software for your VAT return, HMRC may charge a penalty of up to £400 for each return you file. Similar fines are likely to apply to MTD for Income Tax.

How to avoid Making Tax Digital penalties

Your penalty points are tracked separately for each tax. If you need to submit both VAT and Income Tax returns, you'll have separate point totals for each. This means you could face penalties for both at the same time.

Here's how to avoid MTD penalties:

• Use compatible software: Make sure your accounting software is approved for MTD
• Set up digital links: Connect your systems digitally so data transfers automatically without manual entry
• Submit on time: Mark all deadlines in your calendar and submit early to avoid last-minute issues
• Keep digital records: Store all your business records digitally

From April 2026, sole traders and landlords with income over £50,000 will need to follow the points-based penalty system.

Will HMRC waive penalties?

Yes, you can appeal an MTD penalty. HMRC has a reviews and appeals process. To succeed, you'll need to show you had a reasonable excuse for missing the deadline. An appeal doesn't guarantee your penalty will be removed, but it gives you a chance to have your case reviewed.

HMRC can also decide not to give you a penalty point or issue a fine in certain circumstances.

Get ready for Making Tax Digital with Xero

The points-based system means you won't be penalised for the occasional mistake if you normally file on time. The system is designed to target businesses that repeatedly miss deadlines or don't follow MTD rules. Staying on top of your submissions will help you avoid unnecessary costs.

Xero makes MTD compliance straightforward. Our cloud accounting software is fully MTD-compatible and automatically creates digital links between your records, so you can track your finances in real time and submit returns on time. With automatic reminders for upcoming deadlines and seamless integration with HMRC, you'll have everything you need to stay compliant and avoid penalties.

For information on how Making Tax Digital affects accountants and bookkeepers, check out our expert MTD resource hub. You can also learn about MTD for Income Tax requirements on our MTD for IT resource hub.

FAQs on Making Tax Digital penalties

Here are answers to common questions about Making Tax Digital penalties.

How much is the fine for MTD non-compliance?

Here's what you could be fined:

• Late submission fines: £200 when you reach your penalty point threshold
• Not using compatible software: up to £400 per return
• Late payment charges: HMRC charges interest from day 1 on unpaid amounts. Penalties start at day 16 (3% on amount owed at day 15) and day 31 (additional 3% on amount owed at day 30, plus daily charges at 10% per year on remaining balance)

The amount of interest you pay depends on how much tax you owe and how long it takes you to pay.

What happens if I miss my VAT return deadline?

You'll get one penalty point each time you submit a VAT return late. When you reach your penalty point threshold, you'll need to pay a £200 fine. The threshold depends on how often you submit returns. Most businesses submit quarterly, which means the threshold is four points.

To avoid fines, submit your VAT return to HMRC as soon as possible. If you're close to the threshold – for example, if you have three points – make it a priority to file on time next time. If you can't pay your VAT bill, contact HMRC to set up a payment plan that spreads the cost over time.

How does the points-based penalty system work?

Every time you submit late for MTD for VAT or MTD for Income Tax, you get one penalty point. When you reach a certain number of points, you'll be fined £200. The threshold depends on how often you submit returns:

• Annual submissions: 2 points
• Quarterly submissions: 4 points
• Monthly submissions: 5 points

Penalty points stay on your record for 2 years. Once you reach the threshold, you'll need to submit on time consistently to avoid more fines.

Can I appeal an MTD penalty?

Yes. If you get a £200 fine, HMRC will send you a letter explaining how to request a review. You have 30 days from when the penalty was issued to appeal. You'll need to explain why you think the penalty is wrong or why you had a reasonable excuse for being late.