Making Tax Digital Penalties: Late Submission Fines Explained

The new MTD penalty system works like penalty points on a driving licence. Each time you miss a submission deadline, you receive one penalty point. The points accumulate, and when you reach a set threshold, you receive a financial penalty. For MTD for ITSA, the submission frequency is quarterly (plus the Final Declaration), which means 5 submissions per year. The penalty point threshold is 4 points. Here is how it works in practice: - **1st late submission**: 1 point (no fine) - **2nd late submission**: 2 points (no fine) - **3rd late submission**: 3 points (no fine) - **4th late submission**: 4 points — **£200 fine triggered** - **5th and subsequent late submissions**: £200 fine for each one (while at the threshold) This means you can miss up to 3 quarterly submissions before receiving any financial penalty. The system is deliberately lenient for occasional lateness but escalates for persistent non-compliance. Points do not expire automatically after a set period like driving licence points. Instead, you must actively demonstrate compliance to reset them (see the section on resetting points below).

HMRC has confirmed a soft landing period for the first year of MTD for ITSA (the 2026/27 tax year). During this period: - **No penalty points** will be issued for late quarterly updates - You will not receive the £200 fine even if you miss all four quarterly submissions - HMRC will still send reminders and notifications about missed deadlines This is a significant concession. It means the first year is effectively a practice year where you can get used to the new system without financial consequences for quarterly submissions. **However, the Final Declaration is not covered by the soft landing.** Your Final Declaration for 2026/27 is due by 31 January 2028, and the standard Self Assessment late filing penalties apply: - 1 day late: £100 fixed penalty - 3 months late: £10 per day for up to 90 days (maximum £900) - 6 months late: 5% of tax due or £300, whichever is greater - 12 months late: additional 5% of tax due or £300, whichever is greater The soft landing does not mean you should ignore quarterly deadlines. Building the habit early makes compliance much easier once the penalty points start counting from 2027/28.

A quarterly update is considered late if it is not submitted by the deadline for that quarter. The deadlines are: - **Q1** (6 April – 5 July): Due 7 August - **Q2** (6 July – 5 October): Due 7 November - **Q3** (6 October – 5 January): Due 7 February - **Q4** (6 January – 5 April): Due 7 May - **Final Declaration**: Due 31 January following the end of the tax year If you submit your Q1 update at 11:59pm on 7 August, you are on time. If you submit at 12:01am on 8 August, you are late and will receive a penalty point (from 2027/28 onwards). There is no grace period. The deadline is the deadline. However, HMRC has confirmed that submission means the data being received by HMRC's systems — so if you press submit at 11:55pm and it takes a few minutes to process, you should still be fine as long as the submission was initiated before midnight.

Once you have accumulated penalty points, the only way to reset them to zero is to achieve a period of full compliance. This means: - Submitting all returns on time for a consecutive period of **24 months** - All outstanding returns from before the 24-month period must also be filed For quarterly submissions, 24 months means 8 consecutive on-time quarterly updates plus 2 Final Declarations. That is a significant commitment, which is why HMRC describes this as a system that rewards consistent compliance rather than punishing isolated mistakes. If you are at 3 points and submit one more late, you hit the threshold and get the £200 fine. To reset, you then need 24 months of perfect compliance. During that 24-month reset period, if you miss another deadline, the clock resets and you need another 24 months. This makes it much more important to avoid hitting the threshold in the first place. Three missed deadlines over several years is very different from three missed deadlines followed by a struggle to maintain 24 months of compliance.

The points system only applies to late submissions. Late payment of tax is penalised separately under a different system. For MTD for ITSA, late payment penalties work as follows: - **Up to 15 days late**: No penalty (but interest accrues from day 1) - **16–30 days late**: First penalty charge — calculated at 2% of tax outstanding at day 15 - **31+ days late**: Additional 2% of tax outstanding at day 30, plus a daily rate of 4% per annum on the outstanding balance Late payment interest is charged at the Bank of England base rate plus 2.5%. As of February 2026, this means interest of approximately 7% per annum on unpaid tax. Payment on account dates for Self Assessment remain unchanged. You still pay on 31 January and 31 July each year. MTD quarterly updates do not create new payment dates — they are reporting obligations, not payment obligations. If you cannot pay on time, contact HMRC as early as possible to arrange a Time to Pay agreement. This does not remove the interest charge but can prevent escalation of penalties.

If you are also registered for MTD for VAT, be aware that VAT has its own penalty regime that has been in place since January 2023. The principles are similar (points for late submissions, percentage-based late payment penalties) but the thresholds differ. For quarterly VAT returns, the penalty point threshold is 4 points. For monthly VAT returns, it is 5 points. For annual VAT returns, it is 2 points. VAT late payment penalties follow the same 15/30/31+ day structure as Income Tax. The 2% and 4% rates are identical. If you are subject to both MTD for ITSA and MTD for VAT, your penalty points are tracked separately for each regime. Points from VAT do not count towards your ITSA threshold and vice versa.

If you receive a penalty you believe is unfair, you can appeal within 30 days of the penalty notice. HMRC will consider your appeal if you have a reasonable excuse for the late submission or late payment. Examples of what HMRC typically accepts as a reasonable excuse: - Serious illness or hospitalisation that prevented you from filing - Death of a close family member shortly before the deadline - HMRC's own systems were down or unavailable when you tried to submit - A fire, flood, or other natural disaster destroyed your records - Your software provider had a system failure that prevented submission Examples of what HMRC typically does not accept: - You forgot the deadline - You were too busy with work - You did not know about MTD or the deadlines - Your accountant failed to file on time (you are still responsible) - You found the software difficult to use - You had a cash flow problem (for late payment appeals) To appeal, you can use HMRC's online service, write to them, or call the Self Assessment helpline. If your appeal is rejected, you can request a statutory review and, if still dissatisfied, appeal to the First-tier Tribunal (Tax Chamber). Keep detailed records of any circumstances that prevented you from filing on time. A GP letter, hospital discharge note, or screenshot of a software error message can be the difference between a successful and unsuccessful appeal.

The simplest way to avoid MTD penalties is to submit on time, every time. Here are practical steps: 1. **Set calendar reminders** for at least 2 weeks before each quarterly deadline (7 Aug, 7 Nov, 7 Feb, 7 May, 31 Jan) 2. **Keep records up to date** throughout the quarter rather than scrambling at the deadline 3. **Use software that sends automatic reminders** — most MTD-compatible software will notify you 4. **Submit early** — there is no benefit to waiting until the deadline. Submit as soon as the quarter ends. 5. **Appoint an agent** if you cannot manage the submissions yourself — they can submit on your behalf 6. **Check your submissions were received** — log into HMRC to confirm each submission was accepted AccountsOS tracks your quarterly deadlines and sends reminders automatically. Because your records are kept digitally throughout the quarter, submitting is as simple as confirming the figures and pressing submit — no last-minute data entry required.