Making Tax Digital penalties: What triggers them and how to stay compliant

A few months of poor process control can push your finance team past the points threshold. From there every late submission costs another £200, with late payment charges and interest running separately. Most MTD penalties come from broken workflows, not missed deadlines. The best protection is in place before the first quarterly cycle runs.

VAT and Making Tax Digital for Income Tax Self Assessment (ITSA) both use points-based late submission penalties, but they run as separate regimes with separate point pools and separate thresholds. Every taxpayer mandated into MTD ITSA sits at a flat four-point threshold. VAT thresholds vary with filing frequency. The older Self Assessment penalty system continues to apply to trust and estate returns, partnership returns, and non-resident company returns, and from 6 April 2027 the new penalties extend to everyone who files a personal Self Assessment return. This is general guidance for UK finance teams, not tax advice. Penalty calculations depend on your specific circumstances, so consult a qualified tax adviser before making decisions based on the rules covered here.

Understand how the MTD penalty system works

Late submission penalties and late payment penalties work independently. Crossing the threshold on one doesn't affect the other, and a single overdue return can trigger both.

Late submission penalties: the points-based system

Every time you miss a filing deadline, you receive one penalty point. No financial penalty applies until your points reach the threshold for your regime, and the two regimes set that threshold differently.

Once you hit the threshold, every further late submission triggers an additional £200. The amount stays at £200 per failure, and the penalties keep stacking.

Two details in that table cause the most confusion. First, MTD ITSA has no separate annual threshold: a late Final Declaration earns one point in the same four-point pool as a late quarterly update, so the £200 lands on the fourth missed deadline of either kind. Second, VAT and ITSA points sit in separate pools, so a late VAT return won't push you closer to the ITSA threshold.

Late payment penalties: percentage-based charges

From 31 May 2025, new late-payment rates apply to VAT and to early Making Tax Digital ITSA volunteers. If you are mandated into MTD ITSA, the percentages step up after your first year, so the charge for the same delay depends on which tax year the payment relates to.

Late payment penalties apply to each late payment rather than accumulating points, and they don't apply to payments on account. Late payment interest also runs from day one of non-payment, regardless of whether you receive a financial penalty.

Recognise the actions that trigger MTD penalties

Most penalties trace back to a few recurring patterns, and they aren't usually about missed deadlines. The issue is how your audit trail and software are set up.

Filing without compatible software

Using software HMRC doesn't recognise may lead to penalties on VAT returns. Filing on paper when you're not eligible can attract a penalty of up to £400. For MTD ITSA, non-approved software can trigger record-keeping failure penalties of up to £3,000 after a compliance check.

Failing to maintain digital records

For MTD for VAT, you don't need to scan paper invoices and receipts, but every transaction must be recorded in your electronic account. Failing to maintain digital records triggers daily penalties under section 69 of the VAT Act 1994. The daily charge runs from £5 to £15, depending on whether you've had previous breaches in the past two years. HMRC caps it at 100 days per incident and must issue a written warning before assessing the penalty.

For MTD ITSA, the ceiling is much higher. HMRC can impose a penalty of up to £3,000 for failures to keep digital records or maintain digital links. These penalties aren't automatic. HMRC has to make a deliberate decision to impose them, as the ICAEW Tax Faculty notes.

Breaking the digital link

Copy-and-paste between software applications isn't a digital link under HMRC's rules. Every transfer of data between two pieces of software in your reporting chain must happen electronically, without manual re-keying.

Picture a finance team exporting invoice data from a spend management platform to a CSV file, then uploading that file into their accounting system. That's a manual step, and HMRC treats it as a broken digital link. The rule applies across your entire software chain, including any handoff between spreadsheets, bridging software, and your accounting automation tools. A manual step anywhere can create compliance risk.

Missing quarterly update or annual return deadlines

Each missed quarterly deadline earns one point. For the 2026/27 tax year, the quarterly deadlines are:

The Final Declaration (equivalent to the current Self Assessment return) is due by 31 January after the tax year ends, so 31 January 2028 for the 2026/27 year. A missed Final Declaration deadline earns one point in the same pool as the quarterly updates, not in a separate annual one. Inaccuracy penalties, by contrast, don't apply to quarterly updates at all, only to the Final Declaration.

Failing to sign up when required

If you're in scope but haven't signed up, you're still liable for the full penalty system as though you had. Grace period rules for quarterly update points apply only if you've signed up and are using compatible software.

So who actually has to comply, and from when? That depends on your income level and your place in the phased rollout.

Confirm whether you're in scope

The income threshold trips a lot of people up. The gross income test uses your combined gross income from self-employment and UK property, before any expenses are deducted. PAYE income doesn't count.

If you earn £29,000 from a sole trade and £22,000 from rental property, your combined qualifying income is £51,000. That puts you in scope from April 2026 even though neither source individually exceeds £50,000.

MTD ITSA rolls out in three phases, with the threshold dropping each year:

A threshold-locking rule also catches people off guard. If your turnover exceeded £50,000 in 2024/25 but drops below it in 2025/26, you're still required to comply from April 2026. Once you're mandated, you stay in MTD until your qualifying income has been below the threshold for three consecutive tax years.

Limited companies and partnerships are currently excluded, and narrow exemptions exist for digital exclusion, missing National Insurance numbers, identity verification failures, trustees, and personal representatives.

Use the 2026/27 grace period

If you fall within scope from April 2026, the first year offers limited breathing room. Penalty points guidance confirms HMRC won't apply points to late quarterly updates during 2026/27.

The Final Declaration doesn't get this grace period. The 2026/27 Final Declaration (due 31 January 2028) falls under the new system in full. A late Final Declaration earns one point in your four-point ITSA pool, and the £200 penalty lands when that pool reaches four. From 6 April 2027, the new penalty system extends to all Self Assessment taxpayers, including those not yet mandated into MTD. One case does carry a two-point threshold: if you become exempt from MTD in 2027/28 or later, you stay under the new penalties but your threshold drops from four points to two, with your existing points scaled down so you're no closer to it than you were.

Late payment penalties still apply, but with an extended grace period. In the first year under the new rules, you have 30 days from the payment due date to pay in full or agree a Time to Pay arrangement, instead of the standard 15-day window. This 30-day window applies only once, and only for the first mandated year.

Building all this before April 2026 sounds heavy. In practice, most finance teams already run the underlying pieces (company cards, accounts payable (AP) automation, an accounting platform), and the work is connecting them so the data flows electronically. A practical approach is to use 2026/27 to run your quarterly processes end to end, identify bottlenecks, and fix them before points-based penalties kick in from 2027/28.

Once the grace period ends, the only way to clear accumulated points is through the formal reset mechanism.

Reset accumulated penalty points

Points accumulated below the threshold expire after 24 months. What if you've already crossed the threshold, though? Resetting points to zero once you've reached the penalty level requires meeting two conditions simultaneously.

First, you must submit all obligations on time for the relevant compliance period: 12 months for MTD ITSA taxpayers and quarterly VAT filers, six months for monthly VAT filers, and 24 months for annual VAT filers. The clock starts from the first day of the month after your most recent failure. Second, all returns due within the previous 24 months must have been received by HMRC.

Both conditions must be satisfied at the same time. If you've been filing on time for 11 months but still have an outstanding return from 18 months ago, your points stay where they are.

If the reset route fails, your remaining option is to challenge the penalty itself.

Appeal a penalty when grounds exist

You have 30 days to appeal from the date of the penalty notice. HMRC's penalty notice will explain how, usually online through your HMRC account or in writing. Your appeal must state the grounds.

HMRC overturns around 63% of the automated penalty decisions it reviews, according to its own performance data for 2025/26 through February 2026. That's a strong reason to mount a well-constructed challenge at internal review. Tribunal appeals fare differently, with HMRC winning most cases that escalate that far. Make your case at internal review first.

The legal test for a reasonable excuse asks what a reasonable person in your situation, genuinely trying to comply, would have done. HMRC accepts circumstances like serious illness, unexpected hospital stays, fire or flood destroying records, and HMRC's own service failures. The First-tier Tribunal upheld this principle in ESC Studios v HMRC, where HMRC's own delays in processing a repayment were accepted as a reasonable excuse for late VAT payment.

Forgetting the deadline and general ignorance of the rules won't work, and neither will pressure of work or the absence of a reminder from HMRC. Two further grounds are conditional rather than excluded outright, and both are worth testing before you write off an appeal. Insufficiency of funds fails unless the shortage arose from events outside your control. Relying on another person, including an accountant or agent who missed the deadline on your behalf, fails unless you took reasonable care to avoid the failure. HMRC reads reasonable care as explaining what you needed done, setting a deadline for it, and checking on progress, so keep the emails and call notes that show you did.

If you're considering an appeal, document exactly when the obstacle arose and when it was resolved. Once the obstacle passes, you need to act without unreasonable delay. If HMRC rejects your appeal, you can request an independent internal review by a different officer, or proceed directly to the First-tier Tax Tribunal.

Appeals are a fallback. The stronger position is building workflows that prevent penalties from arising in the first place.

Build workflows that prevent penalties

Building quarterly reporting workflows from scratch while running your existing month-end close is a significant amount of work. The first few months will be uncomfortable. The good news is that the components are well established; the work is sequencing them and proving they hold up before the first deadline.

Verifying your software against HMRC's recognised list

A spreadsheet alone isn't compliant. You need bridging software to connect it to HMRC via an application programming interface (API). HMRC's recognised software list includes both full accounting platforms and bridging tools that let you keep spreadsheet-based records while submitting digitally. If you're running an enterprise resource planning (ERP) system like SAP or Dynamics, it's worth confirming that your VAT module or bridging software appears on the list. The ERP itself may not be sufficient without a certified API connection.

Mapping and documenting your digital links

Start by tracing the data flow from source transaction through to HMRC submission. Each transfer point must be electronic. Where your spend management or AP automation software feeds data into your accounting platform, that connection needs to be an API integration. A manual CSV export with re-entry breaks the digital link.

Connecting spend management upstream of the digital chain

Spendesk is an all-in-one spend management platform consolidating company cards, expense management, accounts payable, procurement, and budgeting. That consolidation matters for MTD compliance. Purchase orders, approved invoices, and payment records get captured at source in a single system. VAT extraction and receipt capture feed the accounting platform through an API. The result is the digital audit trail MTD requires, captured at the point of spend.

For example, Niji had a 10% receipt recovery rate before centralising spend on Spendesk. According to Niji's case study, the platform took them to near-complete receipt capture. That's the kind of evidence MTD requires you to have ready for HMRC inspection.

Building quarterly update standard operating procedures (SOPs) before the first deadline

Test early to see how long each quarterly cycle takes. During 2026/27, you'll also be running two systems at once. The new MTD quarterly submissions cover the current year, while the final Self Assessment for 2025/26 (due 31 January 2027) sits under the old system.

Requiring vendor confirmation of digital link compliance

When evaluating or renewing contracts with AP automation or spend management vendors, ask in writing for confirmation that their integration maintains digital links as HMRC defines them. Receipt capture, VAT extraction, and audit trails can support HMRC review.

Signing up before HMRC sets your timeline

HMRC will eventually set up quarterly filing obligations for those who don't sign up, but waiting means the timeline is outside your control. Signing up early lets you test your workflows during the grace period.

Treat MTD as a data architecture problem

From threshold to repeated penalty takes only a few quarters of loose process control. Once you cross the threshold, every further missed submission adds another £200, with late payment charges and interest running separately. The 63% overturn rate on reviewed penalties shows HMRC's automated system isn't perfect, but you're better off never needing to file an appeal.

The way out is operational: verified software, documented digital links, digital record-keeping captured at source, and quarterly workflows tested before deadlines start generating points.

To see how Spendesk handles spend capture, approvals, and the data trail your accounting platform needs to stay MTD-compliant, explore the platform.

Frequently asked questions about Making Tax Digital penalties

Do MTD penalty points expire?

Yes. Points accumulated below the penalty threshold expire after 24 months from the month they were applied. Once you've crossed the threshold and incurred a £200 penalty, points only clear through the formal reset mechanism. That means 12 months of on-time submissions for MTD ITSA taxpayers and quarterly VAT filers, six months for monthly VAT filers, or 24 months for annual VAT filers, plus all returns due in the previous 24 months received by HMRC.

Can I appeal an MTD penalty if I have a reasonable excuse?

Yes. You have 30 days from the penalty notice to appeal, and HMRC will explain how in the notice itself. Reasonable excuses include serious illness, bereavement, fire or flood destroying records, or HMRC's own service failures. Forgetting the deadline and general ignorance of the rules won't qualify. Two grounds are conditional rather than excluded: a shortage of funds can count where it arose from events outside your control, and relying on an accountant or agent who missed the deadline can count where you took reasonable care to avoid the failure. HMRC overturns around 63% of automated penalties at internal review, so a well-documented appeal is worth the effort.

Does the 2026/27 grace period cover late payments?

Only partially. The grace period waives penalty points on late quarterly updates during the first year, but late payment penalties still apply. The one concession is timing: in your first year under the new rules, you have 30 days from the payment due date to pay in full or agree a Time to Pay arrangement, instead of the standard 15-day window. This extended window applies only once.

How do MTD ITSA and MTD VAT penalty points interact?

They don't. Points are held in separate pools by tax type. A late VAT return earns a point in your VAT pool only, not in your ITSA pool, and vice versa. Each pool has its own threshold. Every taxpayer mandated into MTD ITSA sits at 4 points, covering quarterly updates and the Final Declaration together, with no separate annual threshold. VAT thresholds follow filing frequency: 4 points for quarterly filers, 5 for monthly filers, and 2 for annual accounting scheme filers.