Avoiding MTD Penalties: What Every Business Needs to Know
A complete overview of the new points-based system for late submissions
From April 2026, Making Tax Digital for Income Tax introduces a fundamentally new way of penalising late submissions. Think of it like penalty points on a driving licence – you collect points for breaking the rules, and when you reach a certain number, you get fined [2]. This guide explains exactly how the new points-based system works, what triggers penalties, and how to keep your record clean [8].
The New Penalty Landscape: What’s Changing?
The MTD penalty system replaces the old default surcharge regime with a fairer, points-based approach [2]. It’s designed to target businesses that repeatedly miss deadlines while being more forgiving of occasional mistakes [8]. However, once you reach the threshold, the penalties stack up quickly [1].
| Aspect | Old System (Pre-MTD) | New Points-Based System |
|---|---|---|
| First missed deadline | Automatic penalty depending on frequency [2] | Earn 1 penalty point – no immediate fine [2] |
| Multiple failures | Surcharge based on tax owed [2] | £200 fixed penalty when threshold reached [2] |
| Subsequent late submissions | Increasing surcharge percentages | Another £200 for each late submission while at threshold [1] |
| Points expiry | N/A | 24 months of good compliance to clear points [2] |
How the Points-Based System Works
What Triggers Penalty Points?
You can get penalty points for three things [2]:
- Missing a deadline: Each time you submit a return late, you get one penalty point [2]
- Not keeping digital records: If you don’t keep your business records digitally, HMRC can charge you between £5 and £15 for every day you don’t comply [2]
- Not using digital links: If you manually transfer data instead of using digital connections between your systems, you can be charged £5 to £15 for each day [2]
Your penalty points are tracked separately for each tax. If you need to submit both VAT and Income Tax returns, you’ll have separate point totals for each. This means you could face penalties for both at the same time [2].
Penalty Thresholds by Filing Frequency
| Filing Frequency | Penalty Threshold (Points) | Penalty Amount |
|---|---|---|
| Annual submissions | 2 points [2][5] | £200 [2] |
| Quarterly submissions | 4 points [2][4] | £200 [2] |
| Monthly submissions | 5 points [2] | £200 [2] |
Most businesses will submit quarterly, which means the threshold is four points [2]. Once you hit your threshold, you’ll pay a £200 fine. If you continue to submit late while at the threshold, you’ll pay £200 for each additional late submission [1][2].
Example: How Penalties Add Up
A quarterly filer misses four deadlines in a year:
- Miss #1: 1 point (no fine)
- Miss #2: 2 points (no fine)
- Miss #3: 3 points (no fine)
- Miss #4: 4 points → threshold reached → £200 fine issued
- Miss #5: Still at threshold → another £200 fine
- Total fines: £400 [2]
MTD for Income Tax: The Soft-Landing Period (2026/27)
To ease the transition, HMRC has confirmed a “soft landing” for the first year of MTD for Income Tax [4][10]. During the 2026/27 tax year, no penalty points will be issued for late quarterly updates [4][5].
- Final declarations ARE still penalised – the soft landing only covers quarterly updates [4][10]
- Late payments ARE still penalised – interest and payment penalties apply from day one [4]
- Quarterly updates remain mandatory – you must still submit them, just without penalty risk [10]
- From April 2027, full penalties apply – use the first year to build good habits [4]
MTD for Income Tax Deadlines
| Quarter | Period Covered | Submission Deadline |
|---|---|---|
| Quarter 1 | 6 April – 5 July | 7 August [2] |
| Quarter 2 | 6 April – 5 October | 7 November [2] |
| Quarter 3 | 6 April – 5 January | 7 February [2] |
| Quarter 4 | 6 April – 5 April | 7 May [2] |
| Final Declaration | Full tax year | 31 January [2] |
Late Payment Penalties: More Expensive Than Ever
While the points-based system is the biggest structural change, the late-payment regime also shifts significantly – and will likely catch taxpayers out if they’re used to the existing rules [10]. The most notable change is the earlier trigger point for penalties – moving from day 30 to day 15 [10].
| Timeframe | Penalty |
|---|---|
| Day 1-15 | No penalty, but interest runs from day 1 [2][6] |
| Day 16 | First penalty of 3% on tax outstanding at day 15 [2][10] |
| Day 31 | Second penalty of 3% on tax unpaid at day 30 [2][10] |
| Day 31 onward | Daily penalty charged at 10% per annum of the amount outstanding [2][10] |
Example: Late Payment Penalties
A business owes £5,000 in tax and pays 20 days late:
- Interest from day 1: approx. £22 (at current 8% rate) [2]
- Day 16 penalty: 3% × £5,000 = £150 [2]
- Total additional cost: £172
If paid 35 days late, penalties escalate significantly – over £340 in total [2].
The only way to halt late-payment penalties is to agree a Time to Pay (TTP) arrangement with HMRC [10]. However, interest continues to accrue, and if you break the arrangement, HMRC will treat it as though it never existed – applying penalties retrospectively [10].
Soft Landing for Late Payment (2026/27)
For a taxpayer’s first year in the new regime, the day 15 penalty is waived – the first penalty applies from day 30, as under the current system [10].
The day 15 penalty rises from 3% to 4%, and the day 30 penalty rises from 3% to 4% [10]. This makes late payment substantially more costly – plan ahead now.
How Long Do Penalty Points Last?
If You Haven’t Reached the Threshold
If a taxpayer has not reached their threshold, individual points automatically expire after 24 months [2][10].
If You’ve Reached the Threshold
Once the threshold is reached [10]:
- A £200 penalty is charged
- All subsequent late filings trigger another £200 penalty, not additional points
- Points no longer expire after two years
- To reset points, the taxpayer must [10]:
- Meet a compliance period (quarterly filers: 4 submissions on time; annual filers: 2 submissions on time)
- File all outstanding returns from the last 24 months
Other Penalties to Be Aware Of
Failure to Keep Digital Records
HMRC can impose up to a £3,000 fine for failing to maintain adequate records in relation to a return. This includes not maintaining digital records or any issues with digital links within functional compatible software [6].
Not Using Compatible Software
If you don’t use MTD-compatible software for your VAT return, HMRC may charge a penalty of up to £400 for each return you file. Similar fines are likely to apply to MTD for Income Tax [2].
Deliberate Concealment
HMRC can also issue a £300 minimum fine if you deliberately conceal information needed for them to assess your liability [6].
Corporation Tax Penalties (From April 2026)
While separate from MTD, it’s worth noting that Corporation Tax late filing penalties are doubling from April 2026 [5][9]:
- Missed deadline: £200 fine (up from £100) [5]
- More than 3 months late: £400 fine [5]
- Three consecutive missed filings: up to £2,000 [5]
How to Avoid MTD Penalties
1. Use Compatible Software
Ensure your accounting software is approved for MTD [2]
2. Set Up Digital Links
Connect systems digitally – no manual data transfer [2]
3. Submit Early
Mark deadlines and submit before the due date [2]
The Four-Layer Defence
Practitioners can protect clients with this approach [1]:
- Technical assurance: Confirm each client’s software is MTD-compatible, test agent linking and verify last successful submission date [1]
- Process control: Set internal cut-offs (e.g., finish reconciliations five working days before the due date) and enforce them through your team [1]
- Fail-safe escalation: If any client is not ready by the internal cut-off, trigger a partner review and a contingency submission route [1]
- Client engagement: Educate clients about the personal cost of late filings, use automated reminders and provide simple options to make record capture easier [1]
What If You Get a Penalty?
Can You Appeal?
Yes, you can appeal an MTD penalty [2][3]. The appeal must be made in writing to HMRC within 30 days from the date the penalty notice was issued [3]. You’ll need to show you had a reasonable excuse for missing the deadline [2].
The Appeals Process
- Submit appeal: Complete online form or write to HMRC within 30 days [3][7]
- HMRC review: A review officer not involved in the original decision will consider the case [3]
- Outcome: HMRC or the tribunal may uphold the penalty, cancel it, or vary the amount [3]
- Further appeal: If you disagree with the review, you can appeal to the tax tribunal [3]
If a client already has points, treat it as an operational red flag. Review why the deadline was missed, implement immediate remedial measures, and help the client submit an explanation to HMRC where appropriate [1]. The priority is to re-establish on-time filing so points can expire [1].
Your Penalty Prevention Checklist
Need Help Avoiding MTD Penalties?
The new points-based system means prevention is the only practical strategy [1]. With a small amount of organisation you can protect yourself from £200 fines and preserve your compliance record [1]. Our team can help you set up robust systems, monitor deadlines, and ensure you stay on the right side of HMRC.
Book Your MTD Compliance ReviewReferences
1. Tolley. (2026). MTD for VAT Penalties Are Here: How to Protect Clients and Avoid £200+ Penalties. Available at: https://www.tolley.co.uk/knowledge-centre/articles/mtd-for-vat-penalties-are-here-how-to-protect-clients-and-avoid-200-penalties []
2. Xero. (2025). Making Tax Digital penalties: avoid fines with simple steps. Available at: https://www.xero.com/uk/programme/making-tax-digital/making-tax-digital-penalties/ []
3. GOV.UK. (2026). International Exchange of Information Manual – Appeals Against Penalties. Available at: https://www.gov.uk/hmrc-internal-manuals/international-exchange-of-information/ieim905600 []
4. UK Property Accountants. (2026). MTD for Income Tax: Penalties Waived for the First Year. Available at: https://www.ukpropertyaccountants.co.uk/mtd-for-income-tax-penalties-waived-for-the-first-year/ []
5. Macalvins. (2026). How will HMRC’s new system of fines affect you? Available at: https://www.macalvins.com/business/how-will-hmrcs-new-system-of-fines-affect-you/ []
6. Smailes Goldie. (2025). Making Tax Digital – Understanding the new penalty regime. Available at: https://www.smailesgoldie.co.uk/making-tax-digital-understanding-the-new-penalty-regime/ []
7. State Taxation Administration of China. (2024). UK clarifies dispute resolution mechanism for late tax return penalties. Available at: https://www.chinatax.gov.cn/chinatax/c102870/c5236258/content.html []
8. Monahans. (2025). Are you aware of the penalties for non-compliance with MTD? Available at: https://monahans.co.uk/articles/penalties-for-non-compliance-with-mtd []
9. TWP Accounting. (2026). How will HMRC changing its system of fines affect you? Available at: https://www.twpaccounting.co.uk/business-news/how-will-hmrc-changing-its-system-of-fines-affect-you/ []
10. Beancounters Bookkeeping. (2026). Understanding the new MTD ITSA penalty regime. Available at: https://www.beancounters-bookkeeping.co.uk/post/understanding-the-new-mtd-itsa-penalty-regime []
