New penalty regime for Making Tax Digital

HMRC are proposing to introduce a new penalty regime for Making Tax Digital. This will be far more onerous than the existing penalty system that HMRC currently have in place. We alluded to this in our previous article here and we’re now going to cover this in more detail.

New penalty regime for Making Tax Digital

The new penalty regime for Making Tax Digital works on a points based system. However, in this case, points will be imposed for non-compliance and deducted for good behaviour. The new late submission penalty rules will be used for VAT and Income Tax Self-Assessment. It will also replace the one used for Income and Capital Gains Taxes, currently used by HMRC.  

When do the new penalties apply?

HMRC introduced legislation in Finance Act 2021 to implement the new late submission penalty rules in conjunction with Making Tax Digital. 

The new late submission penalty rules will be introduced as follows:

  • For VAT registered businesses they will apply to all accounting periods beginning on or after 1 January 2023. The original date was 1 April 2022, so this something of a welcome reprieve. 
  • If you have business and or property income exceeding £10,000 and are required to submit quarterly returns (see here) these penalties apply from the beginning of the 2024/25 tax year (6 April 2024).
  • For everyone else required to submit a Self-Assessment Tax Return, they will apply from the beginning of the 2025/26 tax year ( 6 April 2025)  

How will the new penalty regime for Making Tax Digital work?

The new system is points based. Essentially the more points that are imposed by HMRC the greater the potential risk of penalties. However these will be deducted for timely and consistent filing by the deadlines.

A point will be received every time a return is submitted late and once a specific threshold is reached (see below) a penalty is charged. Every subsequent late return submission will also incur a penalty. However the points can be reset to zero after a period of good behaviour (filing on time).

You will have a points total for each obligation to submit a return to HMRC under Making Tax Digital. So for example, there may be one total for your VAT and one for your personal Self Assessment submissions. Additionally, there will also be a points total for each business you have. Therefore, your penalty points total could soon start to add up if you are not consistent with your filings.  

If you make two or more failures relating to the same submission obligation, you will only incur a single point for that month. However this maximum of one point per month will not apply across different Making Tax Digital Self Assessment filing obligations.

You may recall that we covered the concept of tax returns 5 times a year (see here). So for example, if you missed your quarterly update, end of period statement and final declaration deadline you could be 'awarded'  as much as 3 points if you miss all three deadlines.

How many points before a penalty is imposed?

The points thresholds (before penalties potentially apply) are as follows:

  • The threshold for annual returns will be 2 points
  • For quarterly returns it will 4 points
  • Those returns which are monthly will have a threshold of 5 points 

If you're compliant and file on time, HMRC will 'reward' you by resetting your points. For annual returns this will be 2 timely submissions, for quarterly returns 4 timely submissions and finally monthly returns will require 6 timely submissions.

Points can only be reset if all submissions due in the previous 24 months have been made. Additionally, these points have a finite lifespan of 24 months, except when the threshold has already been reached. 

Time limits for imposing penalties

HMRC must apply points within specified time limits. Although this will be contingent on the frequency of your submissions (monthly etc) and commence on the date the failure occurred. The time limits are as follows:

  • For annual returns it will be 48 weeks.
  • The time limit for quarterly returns will be 11 weeks.  
  • Those returns that are monthly will have a 2 week time limit.

Additionally HMRC will be able to impose a penalty up to 2 years after the failure which gave rise to the penalty in the first place. 

The above time limits will allow HMRC plenty of time to spot a default and apply points (and penalties), assuming their IT systems are working effectively(!).

Appealing against penalties

It will be possible to appeal against a penalty on the grounds of reasonable excuse. For example one of these is where HMRC's own systems prevent you making a submission. This doesn't bode well for Making Tax Digital when this fully goes live(!). 

Further details of what is considered reasonable excuse can be found here (part 3 of the legislation). However because each penalty point is subject to a separate appeal this could result in an administrative nightmare for HMRC. 

Fortunately HMRC have discretionary powers not to 'award' a penalty or charge a point. Although how freely these powers will be exercised in practice is unclear.


The enquiry process can prove to be a long drawn out (and expensive) exercise for HMRC where they are looking to raise additional taxes for the Treasury. In our opinion, HMRC have been gradually revamping the penalty system, to obtain 'quick wins'. 

Using an analogy this current new penalty regime is similar to that imposed by the police for speeding fines etc. It's therefore vital that you're fully prepared for when the new system is introduced as any default with Making Tax Digital could prove to be arduous and expensive for you! 

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Alternatively, please feel free to complete our Business Questionnaire here.

Spread the word!

Why Friendly

We work with businesses and contractors/freelancers who want to embrace the world of online software and the benefits this brings. Using technology to help our clients is at the core of everything we do.

So if you'd like to find out more, just give a call or drop us an email - no hard sell.

Just friendly, professional advice!

Who we are

We're a small team with over 50 years experience of working with small businesses.

So we're in a unique position to understand the challenges that you face every day in your business.

And what's more, we're fully professionally qualified so you can be sure that your affairs are in safe hands.

Copyright 2016 by TFA Accountants Limited