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 Making Tax Digital (MTD) penalty system is points-based and is due to replace the existing penalty regime in January 2023. Penalties for not complying with MTD will depend on the MTD rules that apply to you. For instance, those registered for MTD for VAT must file their returns using functional and compatible software. If you don’t use compatible software to file your return, it could result in a penalty of up to £400 for every return you file.

Taxpayers will accrue one point for every late submission. This translates into fines once a certain points threshold is reached. A penalty for non-compliance can also be imposed 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. 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 new MTD penalty system will replace the existing penalty system from 1 January 2023 for Making Tax Digital for VAT submissions. It will also apply once Making Tax Digital for Income Tax begins 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. The points threshold for submissions are:

  • Monthly submissions: Businesses who make monthly submissions to HMRC will need to accrue five points for the £200 fine to be applied.
  • Quarterly submissions: Businesses who make quarterly submissions to HMRC will need to accrue four points for the £200 penalty fine to be applied. This includes businesses who submit quarterly VAT returns and MTD for Income Tax updates.
  • Annual submissions: If you make annual submissions to HMRC, you will need to accrue two points for the £200 penalty fine to be applied.

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.

VAT periods beginning on or after January 2023 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.

- Payments made within 15 days after the due date will not be penalised.

- Payments made between 16-30 days after the due date will be subject to a penalty of 2% of the outstanding amount.

- If you still have tax unpaid at 30 days, you’ll be subject to a penalty of 2% of the outstanding amount on day 15, plus 2% of the outstanding amount on day 30. This usually equates to a 4% charge in total. If you still have tax unpaid from Day 31 onwards, you will be subject to a penalty of 4% of the outstanding amount, applied daily.

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. Ordinary partnerships 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 can read more about MTD for ITSA penalties here.

Will HMRC waive penalties?

Taxpayers have a right to appeal points and penalties for MTD. This does not guarantee that HMRC will waive penalties. 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.

For more information on how Making Tax Digital impacts accountants and bookkeepers, take a look at our expert MTD resource hub. You can also learn more about requirements for MTD for Income Tax on our MTD for ITSA resource hub.

Start using Xero for free

Access all Xero features for 30 days, then decide which plan best suits your business.

  • Included
    Safe and secure
  • Included
    Cancel any time
  • Included
    24/7 online support