What is HMRC’s new penalty system for MTD for VAT and Income Tax and how does it work?

As well as a new, digitised tax system, Making Tax Digital for VAT will also see the introduction of two new penalty regimes for late submissions and late payments, which will subsequently apply to MTD for Income Tax and for Corporation Tax.

As long as you continue to be diligent about deadlines, there’s nothing to worry about – HMRC’s new approach is designed to be fairer and less severe, which it hopes will promote more timely submissions, resulting in fewer penalties.

This article will explain how the new systems work, when they come into force, and what your responsibilities are.

When do the new MTD penalty systems come into force?

The new penalty systems will apply to any MTD for VAT submissions from 1 January 2023.

They were originally scheduled to be introduced alongside the full rollout of MTD for VAT this April, but were pushed back by nine months due to deficiencies in HMRC’s IT system.

The new systems will also apply to MTD for Income Tax and Self Assessment (ITSA) and MTD for Corporation Tax when they’re introduced on 6 April 2024 and 6 April 2026 respectively.

What is the new MTD penalty system?

The new MTD penalties for late submission will be applied to you if you fail to meet your obligations to make submissions to HMRC on time.

Instead of receiving an automatic penalty from HMRC for every late submission, you’ll incur a number of points each time you miss a deadline, and only be penalised if you hit a certain threshold.

However, the late submission penalty regime will only apply to regular (monthly, quarterly, annual) submission obligations, not to occasional or irregular submissions. These will continue to be covered by the current penalty system.

How do the MTD late submissions penalties work?

You’ll rack up points for every missed submission deadline, and be charged a financial penalty of £200 when you reach a certain threshold.

The thresholds, which are determined by how often you’re required to make a submission to HMRC, are as follows:

  • Annual – 2 points
  • Quarterly (including MTD for VAT and ITSA) – 4 points
  • Monthly – 5 points

Crucially, you’ll have different points totals for MTD for VAT and MTD for ITSA. So if you reach the points threshold for late VAT returns and subsequently for Income Tax, you’ll be charged two separate £200 penalties.

In most cases, to make compliance easier, even if you have two or more failures relating to the same submission obligation in the same month, you’ll only incur a single point.

However, this rule will not apply across multiple MTD for ITSA submission obligations. For example, if your regular quarterly submission deadline, End of Period Statement (EOPS) deadline, and final declaration fall in the same month, and you missed all three, you’d incur three penalty points.

If you have multiple businesses and are required to submit separate regular updates for each one, you’ll have a different points tally for each business.

Do the MTD penalty points expire?

Each penalty point lasts for two years before expiry. The lifetime of a point begins the month after the month in which it was incurred.

However, if you’re at the penalty threshold, your points will not expire. In order to reset your points to zero after reaching a penalty threshold, you must:

  • Meet all submission obligations for a period of compliance dependent on your submission frequency – 24 months for annual, 12 months for quarterly, and 6 months for monthly submissions
  • Have submitted all submissions due within the preceding 24 months, whether they were initially late or not

What are the new late payment penalties?

As well as the new late submission penalty system, HMRC has also introduced a new late payments penalty system, which is automatically applied if you fail to pay on time.

It operates on the following timeframes:

  • Up to 15 days overdue: no penalty
  • Up to 30 days overdue: 2% of the amount on top of the payment due
  • Day 31 overdue: 2% of what was due on day 15, plus 2% of what was due on day 30
  • More than 31 days overdue: 4% of the outstanding amount, applied daily

As with other HMRC penalty systems, a standard 2.5% interest rate is also applied.

Can I challenge a penalty?

Yes, if you think you have a reasonable excuse for missing a deadline, you can challenge a penalty point. First you’ll have to make your case through the internal HMRC review process. If you don’t agree with the outcome, you can appeal to the First Tier Tax Tribunal.

What next?

As long as you do everything you can to meet your submission obligations and make payments on time, you have nothing to worry about from the new penalty systems.

The best thing you can do to avoid fines is to get your business processes ready for MTD. Find out more about how to prepare on Sage’s Making Tax Digital hub.

This article was written as part of a paid-for content campaign with Sage

Read more: How to use MTD to get VAT right

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