Making Tax Digital (MTD) is no longer optional for many UK businesses.
Whether you’re VAT-registered or preparing for MTD for Income Tax, compliance is key.
But what actually happens if you don’t follow the rules?
In this post, we break down the consequences of non-compliance, the penalties you might face, and how to avoid them.
Quick Recap: What Is Making Tax Digital?
Making Tax Digital (MTD) is HMRC’s initiative to digitise the UK tax system.
The goal is to make tax reporting more accurate, efficient, and easier for businesses.
MTD requires:
- Keeping digital records of income and expenses
- Using MTD-compatible software to submit returns
- Submitting some of your tax returns quarterly
MTD Penalties: What You Need to Know
But if you unintentionally (or intentionally) miss the MTD deadline, here are the key risks:
1. Late Filing Penalties
HMRC uses a points-based system for late VAT returns under MTD:
- You get one penalty point for each missed submission
- When you hit a points threshold (usually 4 for quarterly returns), a £200 fine is issued
- Points expire after 24 months if you remain compliant
2. Late Payment Penalties
Separate charges apply if you pay your VAT late:
- 2% of the outstanding amount if 16-30 days late
- 4% if more than 30 days late
- Daily interest may also be charged
3. Not Using MTD-Compatible Software
Submitting your VAT return through HMRC’s old portal or manually is no longer allowed if you’re required to comply with MTD.
Instead, you need to file your returns using MTD-compatible software.
Risk: HMRC may reject your return or treat it as not filed.
Other Common Compliance Risks
- Manual record keeping: MTD requires digital records, not paper logs or unlinked spreadsheets
- Wrong submission method: You must use software that connects to HMRC’s API
- Forgetting to register for MTD: You can’t just start using software, you must register your business for MTD with HMRC
Final Thoughts: What’s Best for You and Your Business?
MTD compliance doesn’t need to be difficult, but ignoring it can be costly.
Late submissions, incorrect methods, or failing to register properly could lead to penalties, interest charges, and extra stress.
Want to avoid the stress?
