Making Tax Digital for IT Penalties

As part of the Making Tax Digital (MTD) initiative, HMRC’s new penalties aim to encourage timely and accurate submissions. This new system is designed to replace the previous default surcharge, and it brings with it a range of penalties for late submissions and payments.

Penalty anxiety is widespread - 59.2% of landlords say they're worried about making mistakes and facing penalties, and among letting agents (the proffesionals filing this stuff for a living), that rises to 82%. See the full breakdown in our survey of 500 UK landlords and letting agents.

In this article, we’ll explain how the MTD penalty system works, what types of penalties you could face, and how you can avoid penalties altogether by effectively meeting Making Tax Digital for Income Tax (MTD for IT).

How the MTD Penalty System Works

The HMRC’s new penalties is applied to the quarterly updates landlords must submit as part of MTD for IT. Here’s how the system works:

1. Points for Late Submissions

If you fail to submit a quarterly update on time, you will receive a penalty point. The number of points you accumulate will depend on how many late submissions you make.

2. Penalty Triggers

After accumulating a set number of penalty points, a financial penalty will be triggered. The set number of points required before a penalty is applied will depend on the frequency of your updates.

3. Clear Points Threshold

Landlords must reach the following points thresholds before a penalty is applied:

• 1 point per late submission.
• Once you reach a threshold of 2 points, you will be hit with a penalty fee.

4. Financial Penalties

After reaching the penalty point threshold, you’ll face a fixed penalty of £200 per late submission.

Late Tax Payment Penalties You Could Face

Late payments will also incur penalties under the MTD system. The penalties for late payments are:

• You’ll be charged a penalty equal to a percentage of the tax owed for late payments made within 30 days of the payment due date.
• After 31 days there will be a daily accrual amount added to your penalty.

Ongoing Penalties

If you consistently miss deadlines or submit incorrect reports, you may face repeated penalties that can escalate over time. If you fail to keep your updates accurate, expect penalties to increase.

MTD for IT Penalties Summary

Under the new system, taxpayers receive a penalty point for missing an annual submission deadline. A £200 fine applies only after accumulating two points for late final declarations.

For late tax payments, there are two penalties:

1. A fixed percentage charge on the outstanding balance after 30 days.
2. A daily accruing charge from day 31 until the balance is paid.

Review the government documents regarding MTD penalties here.

How to Avoid MTD Penalties

While the MTD penalty system is designed to be fair and provide a grace period, it’s still important to stay ahead of your tax obligations. Here’s how you can avoid penalties:

1. Stay on Top of Deadlines

Make sure you submit your quarterly updates on time and in full. Mark your calendar with the key dates, and make sure you stay organised.

2. Use MTD-Approved Software

To ensure accuracy, use digital record-keeping MTD software (like Landlord Studio). This software integrates with HMRC systems to make your submissions and payments easier and more accurate.

3. Automate Your Tax Tracking

Using MTD-recognised software, you can track income and expenses automatically, ensuring your updates are accurate. Many MTD software solutions, including Landlord Studio, will automatically prepare reports for you, so all you need to do is review and submit.

4. Respond to HMRC Communications

HMRC may send you reminders or notices if they notice late submissions or payments. Make sure you address any issues promptly to avoid additional penalties.

Appealing Penalties

If you do receive a penalty, you may be able to appeal if you have a reasonable excuse for late submission or payment. HMRC considers certain factors, such as:

• Severe illness.
• Natural disasters.
• Computer system failure.

To appeal, you will need to contact HMRC directly, providing the necessary evidence for your case.

Final Thoughts

Meeting MTD requirements is essential if you want to avoid penalties. While HMRC’s new penalty system is designed to be fair and manageable, failing to comply with deadlines or make payments on time can lead to costly consequences.

By staying organised, using the right MTD software, and responding quickly to any issues, you can ensure that your submissions and payments are on time, and penalties are avoided.

Create your free Landlord Studio account today to get ahead of the MTD requirements.

In our next article, we’ll discuss how to choose the best MTD software and streamline your accounting process.