Penalties: Making Tax Digital

HMRC's Making Tax Digital (MTD) programme has resulted in a re-design of penalties for late filing and payment. 

Subscribers see Penalties: points based system and Penalties (VAT)

This is a freeview 'At a glance' guide to penalties under the Making Tax Digital regime.

At a glance

Late submission penalties 

Finance Act 2021 introduced a points-based late filing penalty regime which replaced previous late filing penalties for VAT from January 2023.

Individuals who are mandated into MTD for Income Tax will also be subject to the new regime. Those who are voluntarily taking part in the testing program will also be subject to the new regime, but only in respect of the annual tax return.

  • When a taxpayer misses a submission deadline, they will incur a point. 
    • Points accrue separately for VAT and Income Tax. 
  • A penalty of £200 is charged when the taxpayer reaches a points threshold based on the taxpayer's submission frequency: 
    • Annual: Two points
    • Quarterly: Four points
    • Monthly: Five points
  • Accrued points expire after 24 months where the taxpayer remains below the points threshold. 
  • When a points threshold is reached, all points will expire after the taxpayer has met their return obligations for a set period based on their submission frequency:
    • Annual: 24 months.
    • Quarterly: 12 months.
    • Monthly: Six months.
    • And all returns due within the preceding 24 months have been received by HMRC.
  • Where a taxpayer continues to miss submission deadlines after reaching the points threshold and a penalty has been charged they will be liable for a further fixed penalty for each missed obligation. 
  • Penalties will not be charged, or points recorded, where the taxpayer has a Reasonable excuse for not meeting the submission deadline. 
    • There will be a right to Appeal against points and penalties. 

Late payment penalties

An amended Late payment penalty regime will be aligned across the main taxes. 

  • A first late payment penalty will be payable 30 days after the payment due date based on a percentage of the balance outstanding. 
    • No penalty will be payable if the tax is paid within 15 days of the due date. 
    • Tax unpaid after day 15 will attract a 3% (2% before 1 April 2025) penalty. 
    • Where tax remains unpaid by day 30, the penalty increases to 6% (4% before 1 April 2025).
  • From day 31, a second late payment penalty is charged at 10% per annum (4% before 1 April 2025), accruing on a daily basis based on amounts outstanding. 
  • Penalties will stop accruing where a Time To Pay agreement is reached. Penalties will not be charged where the taxpayer has a reasonable excuse for not making payment on time. 
  • There will be a right to appeal against penalties. 

Implementation 

The new late payment and late submission penalty rules will apply as follows:

  • VAT: accounting periods beginning on or after 1 January 2023.
  • Income Tax:
    • From April 2024 volunteers to test the Making Tax Digital for ITSA, will be subject to the new late submission and late payment penalties. There will be no late submission penalties for missing quarterly updates, during the testing phase of Making Tax Digital for ITSA.
    • ITSA customers with business or property income over £50,000 per year (who are required to submit digital quarterly updates through Making Tax Digital for ITSA) from the tax year beginning 6 April 2026.
    • For those with business or property income over £30,000, the rules will apply from April 2027.
    • For those with business or property income over £20,000, the rules will apply from April 2028.
    • General partnerships from a future date yet to be determined. 
  • HMRC says that it will apply 'a light touch' to penalties for the first 12 months of operation of the new scheme.

Interest harmonisation 

The interest rules for VAT align with Income Tax rules from January 2023. 

  • Where VAT is paid after the due date, late payment interest will be payable from the date that payment became due until the date it is received by HMRC.
  • HMRC will pay repayment interest on overpaid tax and refunds due to be repaid. 

See Penalties (VAT) 

Penalty for failure to keep records under the MTD for Income Tax rules

A new record keeping failure penalty is introduced in Finance (No 2) Act 2017 (paragraph 12 section 60). 

  • If an individual does not keep the records prescribed in the MTD Notices (tertiary legislation) in functional compatible software, HMRC can impose a penalty of up to £3,000 for any quarterly period.

Penalty for deliberately withholding information

Those who are mandated into MTD for Income Tax will also be subject to the penalty for deliberately withholding information in Schedule 25 Finance Act 2021.

  • If a person fails to file a return and if, by failing to file the return, the person deliberately withholds information which would enable or assist HMRC to assess the person's liability to tax, that person is liable to a penalty.
  • The penalty is tax-geared, subject to a £300 minimum, and the percentage is determined by the nature of the information that is withheld and whether the deliberate withholding of information is concealed or not.

Useful guides on this topic

Penalties (VAT)
When do penalties apply for VAT? What penalties are charged and how can they be mitigated?

Penalties: Late Filing MTD
A points-based late submission penalty regime is replacing existing late submission penalties for VAT and Income Tax Self Assessment (ITSA) under Making Tax Digital.

Penalties: Late Payment MTD
Penalties for late payment of tax under Making Tax Digital for VAT and Income Tax.

Penalties: Late Payment
What penalties are charged when tax is paid late? 

Grounds for Appeal: Reasonable excuse
What is considered to be a 'reasonable excuse' when a taxpayer makes an appeal against a tax compliance failure?