Making tax digital: what HMRC’s new penalty regime means for VAT and MTD for income tax

Now making tax digital for VAT opened for more businessesThis follows two new penalty regimes being introduced by HMRC for individuals or businesses who make late submissions and payments.

These new systems will also apply to the MTD for income tax starting April 2026, and possibly the MTD for corporation tax payable before April 2026.

Unfortunately, despite all our best efforts, late submissions and payments do happen.

But the good news is that the new systems are less severe and fairer than previous ways HMRC punished businesses. Their goal is to encourage better behavior rather than simply punishing mistakes.

In this article, we cover the details on HMRC’s new penalties, how the system works, and when they will come into force.

Here’s what we cover:

New penal system implemented Tax Digitization for VAT Submissions by 1 January 2023.

Once Tax Digitization For income tax starts – for sole traders and landlords with incomes above £50,000 in the first phase starting April 2026, and over £30,000 in the second phase from April 2027 – the new penalty system will apply to that too.

The new penalty was intended to cover self-assessed taxpayers as well, but complying Delay in making tax digital for income taxWhich was announced in December 2022, currently there is no start date for people earning less than £30,000.

Therefore, it is somewhat inaccurate to refer to these as the new making tax digital penalty system – although this is what most people may encounter when trying to comply with MTDs.

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Like other HMRC penalties, the new MTD late submission penalty The system seeks to encourage you to submit your tax return on time and commits to what HMRC refers to as “regular submission obligations”.

Making tax digital for income tax Quarterly update required.

This is an example of a regular liability. In other words, it’s not just about getting your tax return or payment in on time, as it was with the previous penalty system.

However, the new late submission penalty system does not apply to timely or irregular submissions to HMRC. will continue to be covered by existing penalty system,

Nor does it apply to other problems with submissions to HMRC, such as your calculation being incorrect and/or paying the wrong amount. All that too continues to be covered by the existing penal system.

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Similar to speeding fines for motor vehicles, the new late deposit system is based on a points system.

Once a business or individual has achieved a certain number of points, a financial penalty of £200 is automatically applied.

Generally speaking, a point is applied each time the 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 range for the penalty depends on the number of times the person or business is required to make submissions to HMRC.

  • Monthly: requires five points to be fined.
  • quarterly: Four points are required. Specifically, this includes both VAT quarterly submissions and quarterly updates for MTD for income tax.
  • annual: Two points are necessary.

An important point to remember is that separate point calculations are entered for VAT and income tax, and the latter may result in separate penalties.

For example, if a VAT return And with the income tax quarterly deadline coming up on the same day, for each close to their limit a person or business could automatically be hit with two £200 fines if they are late with their submissions.

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

However there are notable and potentially common exceptions.

Here’s an example.

If you have three sole trader businesses that use the MTD for income taxes and miss the quarterly report deadline for all three by one month, you’ll probably only get one point.

This is because three quarterly returns have been missed.

These are referred to by HMRC as “uniform submission obligations”.

If the same person has to submit a quarterly return for one line of business, end of period statement for another and a final declaration (for the person, not a line of business) for the third all within a span of one month, then This will attract three points.

This is because they are not the same type of submission.

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

In other words, it could effectively be two years and almost a full month, if the deposit deadline falls on the 1st, 2nd of the month.

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

For those who are over threshold, there must be a period of good behavior in which the person or business meets all submission deadlines. They must also have made all submissions that were due in the previous 24 months – whether these were late or not.

The required period of good behavior is 24 months for annual submission frequency, 12 months for quarterly submission frequency and six months for monthly submission frequency.

Along with the new late deposit penalty points system, HMRC is introducing a new late payment penalty system.

Like the points system, it is applied automatically, and operates as follows:

  • Up to 15 days after payment is due: No penalty.
  • 30 days after payment due: 2% of the amount.
  • Due 31 days after payment: 2% of the amount due on the 15th day, plus 2% of the amount due on the 30th day.
  • 31st day onwards: 4% of outstanding amount, applicable daily.

In addition, as with other HMRC penalty systems the standard 2.5% interest rate applies.

To avoid or reduce the above penalty, you can either make a payment if you miss the submission deadline, or arrange a payment schedule with HMRC over 12 months (which may be notified from time to time). referred to as the payment system).

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

Once a point or penalty has been applied, HMRC cannot remove it unless you use the review and appeal process.

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

The first stage of the HMRC review process will be an interview. If you feel that the result is unsatisfactory then you can approach the First Class Tax Tribunal.

The appeal must include a reasonable excuse for missing the deadline.

There is little businesses can do to prepare for the new penalty system, other than being educated about what to expect and making sure they are ready in plenty of time to meet the submission deadline.

To ensure this, you must start preparing your business processes and systems for tax digitization now, rather than later.

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

Don’t forget that the new points and penalty system does not replace the existing penalty system, which will remain in place in many circumstances.

Editor’s note: This article was first published in October 2021 and has been updated for relevance Delay in making tax digital for income tax,

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