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

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

This replaces the previous VAT penalty system, where penalties were 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.


Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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