What Are the Penalties for Non-Compliance with MTD?

HMRC has introduced a new, fairer approach to penalties under Making Tax Digital. Instead of automatic fines for every slip-up, the system recognises that occasional mistakes happen. A single missed update won’t cost you money immediately, but repeated failures will lead to financial consequences.

MTD penalties now fall into two main areas. First, late submissions are managed through a points-based system, where each missed deadline adds up towards a £200 fine once you cross a set threshold. Second, late payments attract interest from day one and additional penalties if the tax remains unpaid, with charges increasing the longer the delay continues.

In the sections that follow, we’ll look more closely at how HMRC’s points system works, what happens if submission deadlines are missed, and how late payment penalties are applied.

What Happens if I Miss Submission Deadlines?

Each missed quarterly update, or final declaration earns you penalty points, with the number of points allowed before penalties apply depending on your filing frequency. The system accounts for the fact that more frequent filers have more opportunities to make mistakes.

Here’s how the points system works based on your filing requirements:

Most MTD taxpayers will fall under the quarterly filing category, meaning you can miss up to three submission deadlines before receiving your first £200 penalty. The fourth missed deadline triggers the fine.

The system treats all submission types equally; missing a quarterly update carries the same point penalty as missing your final declaration. This approach emphasises the importance of maintaining compliance consistency across all your MTD obligations.

Do Penalty Points Ever Expire or Reset?

Penalty points do expire, but the rules differ depending on whether you’ve reached the penalty threshold. If you accumulate points without reaching your penalty threshold, these points automatically drop off after 24 months, giving you a clean slate.

However, once you’ve been fined, the reset process becomes more complex. You must file all outstanding late returns and then maintain consistent compliance for a specified period before your penalty points reset to zero.

The compliance periods required for resetting after receiving a penalty are:

• Annual filers: 24 months of consistent compliance
• Quarterly filers: 12 months of consistent compliance
• Monthly filers: 6 months of consistent compliance

During these compliance periods, any further missed deadlines not only add new penalty points but also restart your reset clock. This means you need sustained good compliance to clear your penalty history and start fresh.

What if I Pay My Tax Late Under MTD?

Late payment penalties operate separately from late submission penalties, with their own rules and consequences. Even if you submit your returns on time, late payment of the actual tax owed triggers different penalty charges.

Payment penalties follow a staged approach based on how late your payment becomes:

• 0-15 days late: No penalty charge applies, but interest accrues every day from the original due date on the outstanding amount.
• 16-30 days late: A penalty of 2% of the unpaid tax applies, plus continued daily interest on the outstanding balance.
• 31+ days late: An additional 2% penalty applies (total 4%), plus ongoing daily interest that continues until the full amount is paid.

Interest rates are set by HMRC and typically run at several percentage points above base rates, making late payment expensive even before penalties apply. The daily compounding effect means delays become increasingly costly over time.

Payment deadlines under MTD remain aligned with existing Self-Assessment dates, so your payment obligations don’t change from current requirements. However, the improved cash flow visibility from quarterly reporting should help you plan and save for tax payments more effectively.

Can I Avoid Penalties if I Can’t Pay on Time?

If you can’t pay your tax bill by the deadline, Time-to-Pay (TTP) arrangements offer a way to avoid some penalties while managing your cash flow challenges. These arrangements allow you to spread payments over an agreed period, typically up to 12 months.

Setting up a TTP arrangement before your payment deadline can pause penalty charges, though interest continues to accrue on the outstanding balance. Early contact with HMRC is crucial if you anticipate payment difficulties.

HMRC has made its Time to Pay (TTP) arrangements more flexible. For smaller amounts, you can now use online self-service options, while larger or more complex situations can be handled through phone negotiations. To qualify for TTP arrangements:

• You need to be up to date with all your tax returns and other HMRC obligations.
• Have no other outstanding payment arrangements
• Demonstrate genuine financial hardship preventing immediate payment
• Propose realistic payment terms you can maintain

How Can I Avoid MTD Penalties?

The quarterly nature of MTD means penalty points accumulate faster than under annual Self-Assessment; four missed quarterly deadlines trigger penalties compared to one missed deadline previously. Good processes can help you prevent penalties, and you may find that the regular schedule of Making Tax Digital (MTD) improves your financial discipline. Enhanced visibility allows you to manage cash flow and tax obligations better, reducing the risk of payment difficulties.

To avoid penalties, make sure you have reliable systems in place, including suitable software, effective record-keeping, and reminders for deadlines. We recommend setting your internal deadlines a few days before HMRC deadlines and address any technical issues that may arise.

Professional support proves valuable, particularly in your first year, providing accurate submissions and backup systems that reduce missed deadline risks. Use MTD’s improved financial visibility to set aside money quarterly rather than facing large year-end bills; regular small savings prove more manageable. If problems arise, contact HMRC or your adviser early. The penalty system tolerates genuine mistakes if you address them promptly and maintain good overall compliance patterns.