Making Tax Digital penalties

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.