Making Tax Digital penalties

HMRC’s new Making Tax Digital (MTD) penalty system will target taxpayers who make consistent errors with their returns.

Making Tax Digital

How does the Making Tax Digital penalty system work?

The new MTD penalty system is points-based and is due to replace the existing penalty regime in January 2023. For every submission deadline missed, you receive one point. Penalties for not complying with MTD will depend on how frequently you submit.

Taxpayers will accrue points for late submission that translate into fines if they reach a certain points threshold. You could also face a penalty for non-compliance if, for example, you don’t have digital records or digital links in place.

For annual submissions, accruing two points will result in a penalty. For those who make quarterly submissions (this will also apply to MTD for ITSA), four points result in a penalty. And for monthly submissions, taxpayers who collect five points will be subject to a penalty.

If you reach your submission penalty threshold, you’ll incur a £200 fine.

When will the penalty system start?

The penalty system will roll out in January 2023 for MTD for VAT and replace the existing penalty regime.

For non-VAT registered sole traders and landlords, penalties will apply once MTD for Income Tax (ITSA) comes into effect in April 2024.

Will Making Tax Digital penalty points expire?

Yes, MTD penalty points expire after two years. The two years are counted from the month after you received the point. So if you received the penalty point in April, the two-year timeline would begin in May. Points do not expire when you’re at the penalty threshold. You can read more about penalty expiration on the HMRC website.

How much are the new Making Tax Digital fines?

If you reach a penalty threshold, you’ll be subject to a £200 fine. Once you reach that threshold, every following failure to make a payment on time will incur a fine.

How to avoid Making Tax Digital penalties

For every submission obligation you have, you’ll have a separate points total. So, if you submit a VAT return but also need to follow MTD rules for ITSA and send quarterly updates, you could accrue points for both, separately.

You can avoid Making Tax Digital penalties by complying with the rules. Ensure you have compatible software and digital links in place, and that you submit your returns and updates on time.

Avoiding MTD for VAT penalties

For VAT returns, the following penalties apply under the existing penalty system:

  • Up to 100% for the overclaimed or understated tax
  • Up to 30% of the assessment if HMRC sends you an estimate that is too low and you don’t correct them within 30 days
  • £400 if you submit a paper return and are not exempt

Accounting periods beginning on or after January 2023 for VAT taxpayers will come under the new points-based penalty system. The following penalties will be issued for non-compliance:

  • A £200 fine if you reach the points threshold for late submissions, and further fines if you continue to miss payment deadlines during the surcharge period.

You can avoid penalties by having MTD-compliant software in place and meeting the deadlines for your submissions. Learn more about MTD for VAT penalties here.

Avoiding MTD for ITSA penalties

Currently, if you miss the submission or payment deadline for your income tax self-assessment, you’ll be subject to the following penalties:

  • A late submission fine of £100 if your return is up to three months late
  • More, if your submission is later or you fail to pay your tax on time (plus interest)

From April 2024, self-employed people and landlords with turnover above £10,000 will be subject to the new points-based penalty system. All other ITSA taxpayers will follow in April 2025.

According to HMRC, the penalties will also provide a sanction to encourage compliance with the new quarterly updates and end of period statement submissions. You read more about MTD for ITSA penalties here.

Will HMRC waive penalties?

Taxpayers have a right to appeal points and penalties for MTD. You’ll need to use the reviews and appeals process, and have a reasonable excuse for missing a deadline.

HMRC can use their discretion not to levy a point or issue a penalty in particular circumstances. They'll make these decisions based on published guidance.

Conclusion on MTD penalties

As the points-based model comes into place, taxpayers who are consistently compliant but make the occasional error won’t be unduly penalised. Those who are consistently non-compliant with MTD rules or deadlines will face penalties and sanctions.

If you want to learn more about how to comply with MTD rules and avoid penalties, read our guide to MTD for businesses or explore our Making Tax Digital resource hub for small business owners.

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