Chapter 6

Making Tax Digital penalties

We explore HMRC’s new points-based system for late submissions and payments.

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A closer look at MTD penalties

From January 2023, Making Tax Digital related penalties will become part of HMRC’s new points-based system for late submissions and payments.

This replaces the existing VAT penalty system, where penalties are calculated using a percentage of the outstanding VAT amount for the default period. Unfortunately, under this new points-based system, there will be no light touch approach, and businesses must get this right from the start to avoid any penalty charges.

The new penalty system means:

  • Businesses will receive one point for each submission deadline that they miss.
  • A financial penalty of £200 will be payable once points exceed a particular threshold. (Businesses filing quarterly returns, applicable to both VAT and MTD for ITSA, have a threshold of four points.)
  • Once the threshold has been breached, businesses will incur further penalties for additional failures to make submissions on time, but points won’t increase.
  • Points will expire after two years, but will remain in place when businesses are at the threshold to ensure there is a period of compliance before any points are reset.

HMRC has stated that the new points-based system has been planned with fairness in mind so that only a minority of businesses are penalised for making repeated and frequent errors, rather than businesses that make occasional and genuine mistakes.

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