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

Money Matters

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

Now Making Tax Digital for VAT has opened up to more businesses in April 2022, it will be followed by two new penalty regimes from HMRC for individuals or businesses that make late submissions and payments.

These new systems 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 and payments do occur, despite all our best efforts.

But the good news is that the new systems are less severe and fairer than the previous ways HMRC penalised businesses. Their goal is better behaviour, rather than simply penalising mistakes.

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

Here’s what we cover:

The new penalty systems apply to Making Tax Digital for VAT submissions as of 1 January 2023.

They had been due to start alongside the final rollout of MTD for VAT on 1 April 2022.

But they were both moved back by nine months because HMRC’s IT systems will not be ready in time.

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

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

Therefore, it’s somewhat inaccurate to refer to these as the new Making Tax Digital penalty systems – although it’s when attempting to comply with MTD that most people are likely to encounter them.

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 and observe what HMRC refers 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 late submission 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.

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Similar to speeding fines for motor vehicles, the new late submission 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 you at that time.

As you might expect, you can appeal both points and penalties – 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 won’t 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.

If you have three sole trader businesses using MTD for Income Tax and miss the deadline for quarterly reports for all three in one month, you’ll 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 don’t 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.

Alongside the new late submission penalty points system, HMRC is introducing a new late payments penalty system.

Like the points system, this is automatically applied, and 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.

Furthermore, the standard 2.5% interest rate is applied, as with other HMRC penalty systems.

To avoid or mitigate the above penalties, if you miss the submission deadline you can either make a payment, or arrange a payment schedule across 12 months with HMRC (known as a Time to Pay arrangement).

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 systems 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 Making Tax Digital now, rather than later.

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

Don’t forget that the new points and penalty systems 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.

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