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Making Tax Digital: What HMRC’s new penalty regime means for MTD for VAT and Income Tax

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When Making Tax Digital for VAT is opened up to more businesses in April 2022, it brings with it a new penalty regime from HMRC for individuals or businesses that make late submissions.

This new system will also apply to MTD for Income Tax when it begins in April 2024, too, and possibly MTD for Corporation Tax, due no earlier than April 2026.

Unfortunately, late submissions do occur, despite all our best efforts.

But the good news is that the new system is less severe than the previous way HMRC penalised businesses. Its goal is better behaviour, rather than simply penalising mistakes.

In this article, we cover details on HMRC’s penalties, how the system will work, and when the penalties will apply.

Here’s what we cover:

What is the new MTD penalty system?

When do the new MTD penalties apply?

How does the new MTD penalty system work?

Do MTD penalty points expire?

Can I appeal against the points or penalties for MTD?

Final thoughts: What businesses need to do

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Need help getting ready for Making Tax Digital? Download this free guide to learn about MTD for VAT, Income Tax and Corporation Tax, and what they mean for your business.

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27,023 readers have downloaded this guide

As with other penalties from HMRC, the new MTD penalties for late submission system intends to encourage you to make timely submission of periodic tax returns, as well as the observation of what HMRC refer to as “regular submission obligations”.

Making Tax Digital for Income Tax requires quarterly updates.

This is an example of a regular obligation. In other words, this isn’t just about getting your tax return or payment in on time, as with previous penalty systems.

However, the new penalty system doesn’t apply to occasional or irregular submissions to HMRC. These will continue to be covered by the existing penalty regime.

Nor does it apply to other problems associated with submissions to HMRC, such as getting your calculations wrong and/or paying the wrong amount. All of that also continues to be covered by existing penalty systems.

The new Making Tax Digital penalty system is purely about discouraging late submissions.

The new penalty system applies to MTD for VAT submissions as of April 2022. This will include those businesses, such as voluntary VAT filers, who are using MTD for VAT for the first time following the requirement to do so.

In other words, there is no light touch or soft landing period for those new to MTD for VAT.

Once Making Tax Digital for Income Tax begins in April 2024, the new penalty system will apply to that too.

And then, in April 2025, it will apply to all Self Assessment taxpayers for periods on or after 6 April 2025, even if they don’t use MTD for Income Tax.

Therefore, it’s somewhat inaccurate to refer to it as the new MTD penalty system – although it’s when attempting to comply with MTD that most people are likely to encounter it.

Similar to speeding fines for motor vehicles, the new system is based on a points system. After a certain number of points are reached by a business or individual, a financial penalty of £200 is automatically applied.

In general terms, one point is applied each time a submission deadline is missed. HMRC will notify the individual or business at that time.

As you might expect, both points and penalties can be appealed – see below.

The points threshold for the penalty varies depending on how frequently the individual or business is required to make submissions to HMRC.

  • Monthly: Five points are required for the penalty to be applied.
  • Quarterly: Four points are required. Notably, this includes both VAT quarterly submissions and quarterly updates for MTD for Income Tax.
  • Annual: Two points are required.

A key point to remember is that separate points tallies are recorded for VAT and Income Tax, and separate penalties could be subsequently applied.

For example, if a VAT Return and MTD for Income Tax quarterly deadline fall on the same day, an individual or business nearing their threshold for each could find themselves automatically fined two £200 penalties if they’re late with their submissions.

Points are intended to encourage compliance with submission dates, though, and so HMRC will not apply two or more points for failures occurring in the same month (or potentially within the same quarter, with MTD for Income Tax).

There are notable and potentially commonplace exceptions, though.

Here’s an example.

An individual with three self-trader businesses using MTD for Income Tax who misses the deadline for quarterly reports for all three in the space of one month will probably only get one point.

This is the case because three quarterly returns have been missed.

These are what HMRC refers to as the “same submission obligation”.

If the same individual had to submit a quarterly return for one business, an end of period statement for another, and a final declaration (for the individual, not a line of business) for a third, all in the space of one month, then this would attract three points.

This is because these are not the same kind of submissions.

Points expire after two years, although this is counted from the month after the month in which the individual or business received the point.

In other words, this could effectively be two years and almost a whole month, if a submission deadline fell on the 1st, 2nd etc. of the month.

But points do not expire in this period if the individual or business is at the penalty threshold (that is, a £200 fine has been applied).

For those at the threshold, a period of good behaviour must occur in which the individual or business meets all submission deadlines. They must also have made all submissions that had been due in the preceding 24 months – regardless of whether these were late or not.

The required periods of good behaviour are 24 months for an annual submission frequency, 12 months for a quarterly submission frequency, and six months for monthly submission frequency.

Points and penalties are applied automatically but HMRC may, at its discretion, not choose to do so. This will be in line with “published guidance” that HMRC says it will follow.

Once a point or penalty has been applied, HMRC can’t remove it unless you use the reviews and appeals process.

This can be used in any event if you wish to challenge points or penalties that have been applied.

The first stage of this will be an interview HMRC review process. Then you can then move to the First Tier Tax Tribunal if you believe the outcome is unsatisfactory.

Appeals must include a reasonable excuse for missing a deadline.

Other than being educated about what to expect, there’s little businesses can do to prepare for the new penalty system apart from ensuring they’re ready in plenty of time to meet the submissions deadlines.

To ensure this is the case, you should start preparing your business processes and systems for MTD now, rather than later.

There’s no better place to start than our free MTD guides:

Don’t forget that the new points system doesn’t replace the existing penalty system, which will continue to apply in many circumstances.

Editor’s note: This article was first published in October 2021 and has been updated for relevance.

The ultimate guide to Making Tax Digital

Need help getting ready for Making Tax Digital? Download this free guide to learn about MTD for VAT, Income Tax and Corporation Tax, and what they mean for your business.

Get your free guide
27,023 readers have downloaded this guide
27,023 readers have downloaded this guide

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