Making Tax Digital VAT Penalties

Making Tax Digital (MTD) for VAT now applies to all VAT registered businesses, including those that are voluntarily registered for VAT and under the threshold, and with this, comes penalty regimes bought in by HMRC.

There are two new penalty rules for individuals and businesses that make late submissions and payments. Both of these new penalties will also apply to MTD for Income Tax and MTD for Corporation Tax in 2024 and 2026. What’s more, in 2025 it will also apply to all Self Assessment taxpayers.

Late Submission Penalties

The new penalties will apply to submissions from 1st January 2023. It’s interesting to note that HMRC refers to these penalties as ‘regular submission obligations’, for example, on those that are submitted regularly; rather than occasionally,  irregular submissions or those that are calculated or paid incorrectly – these will continue to be covered by the existing penalty scheme.

How Does the Late Submission Points System Work?

The penalties are based on a points system, similar to vehicle speeding fines. After a certain number of points are reached by a business owner or individual, a penalty is automatically applied. The amount of this penalty is a hefty £200. One point is applied each time a submission deadline is missed, and HMRC will contact you each time.

The points threshold varies depending on how frequently you are required to make submissions to HMRC. In general, these are the penalty point thresholds for penalties to be applied:

  • Monthly: Five points
  • Quarterly: Four points. This includes VAT quarterly submissions and MTD for Income Tax quarterly updates
  • Annual: Two points

Separate points tallies are recorded for VAT and Income Tax, with separate penalties subsequently applied.

Points expire after two years, although this is counted from the month after the month in which the business received them. Points do not expire in this period if the individual or business is at the threshold and, instead, a period of good behaviour must occur. Periods of good behaviour include 24 months for an annual submission frequency, 12 months for a quarterly submission frequency, and six months for monthly submission frequency.

Late Payment Penalties

In addition to the late submission penalties, there is also a new late payments penalty system. Penalties are automatically applied as the below:

  • 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

Following this, a 2.5% interest rate is applied, as with other HMRC penalty systems.

To avoid the late payment penalties you can make payments or organise a payment schedule across an annual basis.

Why Are the Penalties Coming into Force?

Although HMRC also has existing penalty regimes, the new penalties are to try and teach better behaviour rather than penalising mistakes. They are to encourage business owners to complete timely submission of tax returns. This means that HMRC won’t apply two or more points for failures occurring in the same month.

Action Required

We would advise that you prepare for the new penalty systems by ensuring that you pay in plenty of time to meet the submissions deadlines. You should also prepare your business systems for Making Tax Digital now. 

Here at James & Uzzell we are expert accountants. Our friendly team is happy to discuss your requirements and help you choose an accounting system that suits you. Call us now on (01792) 799 100 or send an email to