Making Tax Digital penalties and compliance

As Making Tax Digital introduces new reporting requirements, it also brings clearer structure around deadlines and record-keeping.

The system is designed to encourage steady, consistent compliance rather than catch people out so, with the right structure in place, meeting the requirements becomes part of your routine.

Understanding how the rules work gives you confidence that everything is covered and helps prevent unwelcome surprises, especially when your bookkeeping is up to date and your deadlines are clear.

How does the MTD penalty system work?

Making Tax Digital uses a points-based system for late submissions. Each time you miss a filing deadline, you receive one penalty point rather than receiving a financial penalty straight away. Points build up over time and only once you reach a set threshold does a fine apply.

Here’s how that works in practice…

1. You miss your first quarterly deadline. You receive one penalty point. There’s no fine.

2. Later in the year, you miss another deadline. You now have two points. Still no fine.

3. If you miss a third submission, you move to three points.

4. A fourth missed deadline takes you to four points, which is the threshold. This triggers a £200 fine.

5. If deadlines continue to be missed after that, each further late submission results in another £200 penalty.

How long do penalty points stay on your record?

Points don’t remain indefinitely. To reset them, you need to:

• Bring all outstanding submissions up to date

• Stay fully compliant for a set period. This generally means submitting on time for 12 months but you can read HMRC’s full guidance on the points-based system here.

Once those conditions are met, your points are cleared and you return to a clean record.

Does this apply to VAT as well?

Yes. The same points-based approach applies to MTD for VAT. The threshold is different for VAT depending on whether you submit monthly, quarterly or annually. But the structure is consistent. Late filing leads to points and repeated late filing leads to financial penalties.

Staying ahead of the deadlines

While penalties understandably attract attention and can bring with them some nervousness, the wider opportunity is that you can add structure to your bookkeeping. When your records are live and reviewed regularly:

• You see your tax position building throughout the year

• You can set money aside steadily

• You reduce year-end pressure

• You make decisions with better information

We’ve created a practical checklist to help UK business owners prepare for Making Tax Digital and keep their records compliant. You can download it here.

If you’d like support setting up a system that keeps everything steady and predictable, and in staying compliant under Making Tax Digital, get in touch. We’ll make sure you’re on track.