Making Tax Digital - HMRC’s new penalty regime for MTD for VAT and Income Tax explained
Making Tax Digital is the new legislation that aims to make the system easier to use and more accurate for taxpayers.
In April 2022, MTD for VAT will apply to all VAT-registered businesses and it will be followed by two new penalty regimes from HMRC for individuals or businesses that make late submissions and payments.
The new penalty systems will apply to any VAT submissions for tax periods starting on or after 1 January 2023.
Penalties for failing to file MTD for VAT returns on time will follow a points system. HMRC have stated that no actual fines for non-compliance with MTD for VAT will be levied in the first year when the business has made reasonable efforts to comply.
During the first year, HMRC will not issue filing or record keeping penalties where businesses are doing their best to comply with MTD. However, sanctions will remain possible in cases of deliberate non-compliance, and in order to safeguard VAT revenue.
These new penalty systems will also apply for MTD for Income Tax Self Assessment (MTD for ITSA) when it begins in April 2026.
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How do the late submissions penalties work?
A points-based system will be used to make businesses submit their MTD reports on time with late submission penalties. Points will be given for each report or payment that is late. Once points exceed a threshold a penalty will be charged for all subsequent missed deadlines.
After meticulously following the rules for a while, points will expire.
There will be an appeal process against points and HMRC have discretion to waive points.
The points system will be expanded to all tax submissions in time.
Provided businesses try to comply, HMRC say they will not give penalties for non-compliance in the first 12 months of MTD for VAT.
After a certain number of points are reached, a financial penalty of £200 is automatically applied.
The points threshold for the penalty varies depending on how frequently you are required to make submissions to HMRC. They are as follows:
- Annual: 2 points
- Quarterly: 4 points (this includes both VAT quarterly submissions and quarterly updates for MTD for ITSA)
- Monthly: 5 points
It is important to remember that you’ll have different points totals for MTD for VAT and Income Tax.
The penalties that you will face will be determined by your failure to make a timely submission. The new system will assess your lateness according to points, so a single missed monthly submission will only earn you a single point. This will give you an opportunity to make your next monthly submission in a timely manner and avoid the financial penalties that come with repeated lateness. Moreover, repeat offenders may not change their behaviour and end up with a lot of points.
However, you will not be penalised if you submit your tax within 15 days. Instead, you will be penalised at intervals based on the amount of outstanding tax. For instance, if you fail to make a payment on time twice in a month, you will only receive one point. This is why the penalty system for late submissions is so important.
Do MTD penalty points expire?
The penalty point lasts for two years before expiry - this is counted from the month after the month in which the point is received.
If you’re at the penalty threshold, your points will not expire.
What are the new late payment penalties?
HMRC is also introducing a new late payments penalty system.
It operates as follows:
- Up to 15 days after payment was due: no penalty
- Day 30 after the payment was due: 2% of the amount
- Day 31 after payment was due: 2% of what was due on day 15, plus 2% of what was due on day 30
- Day 31 onwards: 4% of the outstanding amount, applied daily
If you fail to submit your taxes on time, you'll get a £200 financial penalty for missing one of them. The points are calculated based on your frequency of HMRC submissions. Businesses and individuals who are doing quarterly VAT and Income Tax will be more likely to have missed a filing on at least one month in a year.
Can businesses appeal against the points or penalties for MTD?
If there is a reasonable excuse for missing a deadline, you can challenge a penalty or point.
What businesses need to do?
The best way to avoid this is to make your payments on time and get your returns into the HMRC system. You should also remember that HMRC can't remove penalties or points until you appeal. But you can always appeal against the points. You can use an appeal to challenge the penalty, but this won't remove the penalties.
Additional useful information