The UK’s tax system is expanding its digital footprint —and it’s now no longer just a suggestion. With Making Tax Digital (MTD), HMRC is stepping up its efforts to ensure everyone follows the new rules.
Currently it affects all businesses paying VAT but from next year, qualifying landlords and the self-employed will be in its target for income tax payments; and failing to comply with your filing requirements, could now hit you harder than ever.
Penalties are increasing, deadlines are stricter, and there’s little room for error. In this blog, we will discuss MTD penalties in detail and how an accountant can help you with this.
Why are MTD penalties increasing?
The UK’s tax system is evolving with stricter penalties under the Making Tax Digital (MTD) regime, aiming to modernise reporting and reduce the tax gap.
1. To close the tax gap
Each year, billions of pounds in tax revenue go uncollected due to errors, late payments, or non-compliance. According to the HMRC, in 2022–2023 alone, the UK’s tax gap was 4.4%, which is around £39.8 billion. By tightening rules and enforcing digital reporting, HMRC hopes to reduce this figure significantly.
2. To encourage accurate, digital record-keeping
MTD aims to make tax reporting more efficient and transparent through real-time digital submissions. Penalties have been increased to motivate businesses and individuals to move away from outdated manual methods and adopt digital software that minimises errors.
3. To enforce compliance more effectively
With the new points-based penalty system, HMRC is focusing on persistent non-compliance rather than punishing one-off mistakes. However, repeated errors—even unintentional ones—can quickly lead to fines. The message is clear: regular, accurate submissions are now a non-negotiable part of staying compliant.
Who will be affected?
VAT-registered businesses: As of April 2025, all VAT-registered businesses using Making Tax Digital (MTD) are now subject to the new penalty rates for late filing and late payment.
Self-employed individuals and landlords: Starting from April 2026, self-employed individuals and landlords with annual earnings over £50,000 are required to comply with MTD for Income Tax Self Assessment (ITSA). This threshold is set to reduce to £30,000 in April 2027 and further to £20,000 in April 2028, pulling more and more businesses into the digital tax regime.
Understanding the new penalty structure
The UK government has introduced significant changes to the penalty system under the Making Tax Digital (MTD) initiative, aiming to encourage timely tax submissions and payments. Here’s an overview of what’s changed:
1. Points-based late submission penalties
- Instead of immediate fines for late submissions, HMRC employs a points-based system:
- Each missed submission earns one penalty point.
- Upon reaching a certain threshold—determined by your reporting frequency—you’ll incur a £200 penalty.
- Further missed submissions after reaching the threshold result in additional £200 penalties.
The thresholds are:
| Filing Frequency | Threshold | Penalty |
| Annual | 2 points | £200 |
| Quarterly | 4 points | £200 |
| Monthly | 5 points | £200 |
To reset your points, you must meet all submission obligations on time for a specified period and have no outstanding submissions for the previous 24 months.
2. Enhanced late payment penalties
Late payment penalties have been adjusted to be more penalising for persistent offenders, and to bring the VAT MTD in line with the new MTD ITSA:
- A 3% penalty is charged if payment is 15 days late.
- An additional 3% penalty applies if payment is 30 days late.
- From day 31 onwards, a daily penalty accrues at an annual rate of 10% on the outstanding amount.
3. Implementation timeline
These changes are being rolled out in phases:
- Applied to VAT-registered businesses for accounting periods beginning on or after 1 January 2023.
- From 6 April 2026: Will apply to self-employed individuals and landlords with annual income over £50,000.
- From 6 April 2027: Threshold lowers to £30,000.
4. Importance of compliance
With HMRC’s increased focus on digital compliance, it’s crucial to:
- Use MTD-compatible software for record-keeping and submissions.
- Stay informed about submission deadlines and payment due dates.
- Seek professional advice if you are uncertain about your obligations.
Adhering to these guidelines will help avoid penalties and ensure smooth compliance with the evolving tax system.
What to do if you receive a penalty
Mistakes happen. Here’s how to respond:
- Check the notice: Confirm the tax type, date, and reason for the penalty.
- Appeal if justified: You can challenge the penalty if you have a “reasonable excuse”, such as severe illness, death in the family, or IT system failure.
- Set up a payment plan: If you’re struggling financially, HMRC may allow a Time-to-Pay arrangement.
Fix the root cause: Identify what went wrong and take steps to ensure it doesn’t happen again.
How to avoid or appeal MTD penalties?
MTD penalties can be avoided or challenged—but timing is key. If you can’t pay on time, contact HMRC within 15 days to set up a Time to Pay agreement. This won’t stop interest, but it can prevent penalties.
If you missed a deadline due to illness, bereavement, or technical issues, you can appeal the penalty. Start with HMRC’s internal review and escalate to the First-tier Tax Tribunal if needed. Keep all relevant records to support your case.
Voluntary MTD participation
Choosing to join MTD for Income Tax before it becomes mandatory can be a smart move. It gives you time to adapt without pressure. For those who volunteer early, HMRC has confirmed that no late submission penalties will apply until April 2026.
But there’s a catch—this grace period only applies to missed reports, not missed payments. The new penalty system for late payments has been in effect since January 2023. So, if your tax is unpaid after the deadline, penalties still apply, regardless of when you enrolled in MTD.
New reporting rules from April 2026
From 6 April 2026, if you’re self-employed or earn income from property, you’ll need to follow new digital tax reporting rules under Making Tax Digital for Income Tax (MTD ITSA). Here’s what will change:
1. Digital records: You must track your income and expenses using MTD-compliant software or linked spreadsheets.
2. Quarterly submissions: You’ll need to send updates to HMRC every three months. The deadlines for these submissions are:
a. 5 July
b. 5 October
c. 5 January
d. 5 April
With one month to file each update.
3. Annual filing: You must submit an End of Period Statement and a Final Declaration by 31 January after the tax year. This will replace the Self Assessment return.
It’s important to note that this applies specifically to MTD for Income Tax. MTD for VAT, on the other hand, has already been in place and affects every business that pays VAT.
How can an accountant help?
A professional accountant is your first line of defence against penalties. They can:
- Spot compliance issues before HMRC does.
- Submit accurate, timely returns across all tax types.
- Help you choose and implement the right MTD-compatible software.
- Guide you through appeals, negotiations, or audits.
- Prepare your business for future MTD expansions.
Even if you manage your own books, having an accountant to oversee your tax affairs adds an essential layer of security.
Conclusion
HMRC isn’t slowing down on Making Tax Digital—and waiting it out could mean unnecessary stress (and penalties). If you’re a sole trader, landlord, or business owner, staying compliant doesn’t have to be overwhelming. With the right support, it’s easier than you think.
Let’s sort it together— contact us today and get help to avoid unnecessary fines. The sooner you act, the more peace of mind you’ll have.
