What are the penalties for errors under Making Tax Digital?

Understanding why penalties matter under Making Tax Digital

Making Tax Digital (MTD) is the UK’s long-term programme to modernise the tax system by moving record keeping and reporting into digital processes. For many businesses and landlords, it changes not only how figures are submitted, but also how records must be maintained and how information must move from one system to another. Whenever a compliance regime changes, the big question becomes: what happens if you get something wrong?

The penalties connected to MTD are not a single “MTD penalty” that applies to every mistake. Instead, the consequences depend on what type of tax you are dealing with (for example, VAT under MTD or Income Tax under MTD for Income Tax Self Assessment), what obligation was missed (late submission, late payment, record-keeping, or a failure to use digital links), and whether the issue is a one-off slip or part of a pattern. Some penalties are points-based, some are percentage-based, and some are fixed amounts. In addition, the same underlying error can sometimes trigger more than one penalty regime if it involves both reporting and payment failures.

This article explains the main types of penalties you can face for errors and compliance failures in an MTD context, how the penalty systems work, and what practical steps reduce risk. It is written to help you understand the structure of penalties and how they are typically applied, rather than to provide personalised advice on a specific case.

What counts as an “error” under Making Tax Digital?

When people talk about “errors” under MTD, they often mean any problem that occurs while trying to comply. In practice, HMRC issues and penalties usually sit in distinct buckets. Understanding which bucket you are in helps you predict the likely consequences.

Submission-related errors are problems with getting required updates or returns to HMRC on time and in the correct form. Examples include submitting a VAT return late through MTD-compatible software, failing to submit a required quarterly update (where applicable), or submitting an update that is not accepted because it was not sent using the correct digital route.

Payment-related errors

Record-keeping and digital compliance errors

Inaccuracy errors

It is also worth separating genuine errors from system or process failures. A system failure might include an MTD software connection issue, an outage, a corrupted file, or a misconfigured integration that sends incomplete data. HMRC may still treat the outcome as a compliance failure, but evidence of the cause can be relevant when arguing for “reasonable excuse” or mitigation.

Penalties in an MTD world: multiple regimes rather than one

The most important thing to grasp is that MTD does not replace the UK’s long-standing penalty rules; it sits alongside them and changes the compliance mechanics. That means you might encounter different penalty regimes depending on the obligation breached. In broad terms, the main regimes you should be aware of are:

Late submission penalties (now commonly points-based for many MTD obligations).

Late payment penalties (often based on a percentage of the tax unpaid after certain trigger dates, sometimes with additional interest).

Inaccuracy penalties for incorrect returns or submissions that result in an understatement of tax.

Record-keeping penalties where required records are not kept or not produced when asked.

Failure-to-notify penalties in certain situations where HMRC is not told something that affects tax liabilities.

On top of penalties, interest can apply to late paid amounts. Interest is separate from penalties: you can sometimes have one without the other, though they often come together if payment deadlines are missed.

Late submission penalties: the points-based approach

For many taxpayers within modern reporting obligations, late submissions can be dealt with through a points-based system. Instead of receiving an immediate financial penalty for the first late submission, you accumulate points when you miss submission deadlines. Once you reach a threshold, a financial penalty is charged, and continued late submissions can trigger further penalties.

The points system is designed to focus on repeated non-compliance rather than punishing a single slip. That sounds forgiving, but it can be surprisingly strict for businesses that fall behind over multiple periods. If your internal processes are weak, a points-based system can quickly build to a penalty threshold. Also, points generally do not vanish instantly; they may require a period of compliance to reset, and in some cases you must meet specific “reset conditions” such as bringing all submissions up to date.

The key features of a points-based system typically include:

1) A point for each late submission. If you file after the deadline, you may receive a point even if you file only a few days late.

2) A points threshold that depends on submission frequency. Those who submit more frequently (for example, monthly obligations) can have a different threshold from those who submit quarterly or annually. This is intended to be proportionate to the number of opportunities to be late.

3) A fixed financial penalty once the threshold is reached. When you hit the threshold, you are charged a penalty. If you continue to file late after that point, you may be charged additional penalties for each further late submission, depending on the rules in force for that obligation.

4) Conditions for points expiry or reset. Points may expire after a period of compliance, but only if you meet the conditions. If you have outstanding late submissions, you may not be able to reset your points even if you file later submissions on time.

In practical terms, the points-based approach means you need a reliable filing calendar and a clear division of responsibility. Businesses often assume that “we’ll get a warning first,” but the points are effectively the warning mechanism, and they can accumulate quietly until they become costly.

Late payment penalties: percentage charges and timing triggers

Late payment penalties usually work differently from late submission penalties. Whereas late submission is about whether you provided information by a deadline, late payment is about whether the money reached HMRC by the deadline. Even if you file on time, paying late can trigger penalties and interest. Conversely, paying on time does not protect you from submission penalties if you file late.

Modern late payment regimes often apply a penalty only after the tax remains unpaid for a certain number of days. For example, there may be an initial trigger after a set period, followed by an additional trigger later. The penalty is typically calculated as a percentage of the amount unpaid at the trigger point(s). If the tax remains unpaid for longer, additional penalties can arise, and interest may continue to accrue.

The practical consequences are:

Small delays can still matter. Even if you pay a week or two late, you may cross a trigger that creates an automatic penalty.

Partial payments can reduce penalties. If you cannot pay everything, paying something earlier can reduce the unpaid balance at the trigger dates and therefore reduce the penalty amount.

Time to Pay arrangements can change outcomes. If you agree a formal payment plan with HMRC and keep to it, you may avoid certain penalties that would otherwise apply. But the arrangement generally needs to be in place, and adhered to, to offer protection.

Interest can apply regardless. Interest is usually calculated on the amount outstanding over time. Even if a penalty is waived, interest may still be payable if tax was late.

In an MTD context, late payment risk can increase because reporting becomes more frequent for some taxpayers, and because businesses may become reliant on software workflows that do not always highlight payment deadlines as clearly as submission deadlines. A robust process should include both: filing deadlines and payment deadlines, and an internal check that the payment method (Direct Debit, bank transfer, etc.) will clear on time.

Inaccuracy penalties: when the numbers are wrong

If you submit figures that understate tax or overstate repayments, you may face an inaccuracy penalty. The existence of MTD does not remove the underlying requirement to submit correct information. What MTD changes is how you compile and transmit data, and that can change the risk profile of inaccuracies.

Inaccuracy penalties are typically driven by two big questions: what was the taxpayer’s behaviour and how was the inaccuracy brought to light? Behaviour is usually classified along a spectrum such as careless, deliberate, or deliberate and concealed. The route to disclosure matters because penalties can be lower when the taxpayer tells HMRC proactively rather than being found out through an enquiry or HMRC compliance activity.

Common inaccuracy issues in an MTD setting include:

Misclassification errors in software. If your chart of accounts or VAT tax codes are wrong, you can consistently misreport VAT. This is especially risky because software automates repetition: a single incorrect code can affect hundreds of transactions.

Omitted income or sales. Integrations that fail to import all sales channels, or manual processes that exclude certain revenue streams, can lead to under-declared output tax or income.

Input tax claimed without support. Claiming VAT on invoices that do not meet requirements, or claiming VAT on non-business expenditure, can lead to errors that HMRC may treat as careless or worse depending on circumstances.

Timing errors. Posting transactions into the wrong period can distort returns. Sometimes this is a genuine bookkeeping delay; sometimes it can appear like manipulation if it repeatedly shifts liabilities.

Incorrect adjustments. VAT returns can include adjustments (bad debt relief, partial exemption, corrections under error correction rules, reverse charge adjustments, etc.). Mistakes here can be material and may attract scrutiny.

MTD can increase the visibility of patterns. If HMRC receives more frequent digital data (depending on the regime and the data shared), anomalies can become easier to spot. Even under VAT, where the return is still periodic rather than transactional, the move to digital submission can encourage more automated checks and risk scoring.

Careless vs deliberate: why your processes matter

When penalties depend on behaviour, the distinction between careless and deliberate matters a great deal. Careless errors often involve a lack of reasonable care: weak controls, lack of training, failure to reconcile, or ignoring obvious warning signs. Deliberate errors involve an intention to submit something known to be wrong, such as hiding sales or inventing costs. Deliberate and concealed behaviour typically adds an element of hiding the behaviour itself, such as falsifying records or creating misleading documentation.

Under MTD, a business’s “reasonable care” will often be judged against the reality that digital records and software create an auditable trail. If you have a well-documented process—such as reconciliations, periodic checks, staff training, and a clear approval workflow—you are in a stronger position to show that an error was genuinely accidental and that you took reasonable steps to prevent it.

Examples of process evidence that can help demonstrate reasonable care include:

Documented bookkeeping procedures that show who posts what and how exceptions are handled.

Periodic reconciliations (bank reconciliations, sales control, purchase ledger checks, VAT control account checks).

Review and approval of returns or updates by someone with appropriate knowledge.

Software configuration records showing tax code mapping and any changes made.

Error logs and corrective actions where past issues were identified and fixed.

While none of these guarantee a penalty will be reduced, they make it easier to argue that you acted responsibly and that any mistake was not due to persistent neglect.

Record-keeping and digital links: penalties for failing to meet MTD requirements

MTD includes obligations around keeping digital records and, in some cases, ensuring that data flows between systems through digital links rather than manual copying and pasting. Businesses that use multiple systems—EPOS systems, e-commerce platforms, invoicing tools, expense apps, and accounting software—need to pay close attention to how information travels between them.

A common compliance risk is the “patchwork” approach: exporting a report from one system, copying figures into a spreadsheet, then typing totals into accounting software. Depending on the rules and the specific tax regime, this may breach digital link requirements. Even when spreadsheets are permitted as part of the digital record-keeping chain, the links between spreadsheets and other software may need to be digital, not manual.

Penalties for record-keeping failures can arise where taxpayers do not keep the required records or cannot produce them. In an MTD environment, the failure might not be that you kept no records at all, but that you did not keep them in the required digital format or that the digital audit trail is broken. The consequences can include record-keeping penalties, assessments based on HMRC’s best judgment, and potential knock-on effects if inadequate records lead to inaccurate filings.

Record-keeping issues also increase the likelihood of HMRC enquiries. Even if a specific record-keeping penalty is not immediately charged, poor records can turn a manageable error into a more serious dispute because it becomes harder to prove what happened.

Failure to file using compatible software: what happens if you use the wrong method?

MTD regimes generally require submissions through compatible software or a digital method approved for that obligation. If you attempt to file through an old channel that is no longer accepted, HMRC may treat it as a failure to submit rather than an invalid submission. That can lead to late submission points or penalties if the correct submission is not made by the deadline.

This can occur when:

A business changes software close to a deadline and does not complete the authorisation steps in time.

Agent access is misconfigured and the agent cannot file through the required route.

API authorisations expire and the software cannot transmit the return until reconnected.

Businesses rely on bridging solutions without checking whether the link remains functional after updates.

In these scenarios, the “error” is not primarily numerical; it is procedural. The penalty exposure is still real because the legal obligation is framed around filing in the required way by the deadline.

Reasonable excuse and mitigation: when penalties may be reduced or removed

Not every failure leads inevitably to a penalty that must be paid. Penalty regimes commonly allow for circumstances where the taxpayer had a reasonable excuse for failing to meet an obligation. What counts as a reasonable excuse depends on facts, evidence, and the nature of the failure.

Examples that can sometimes support a reasonable excuse argument include serious illness, bereavement, unexpected and unavoidable disruptions, or demonstrable system failures outside the taxpayer’s control. However, a reasonable excuse argument is not a magic phrase. HMRC will typically look for:

Evidence that the event happened and affected your ability to comply.

Prompt action once the problem ended. If you continue to delay after the obstacle is removed, the argument weakens.

Foreseeability and preparation. Issues that could have been anticipated (for example, leaving filings to the last day when you know your system is unreliable) may be less persuasive.

Mitigation can also occur through voluntary disclosure of errors. If you find an inaccuracy and tell HMRC proactively, the penalty range may be reduced compared with a scenario where HMRC discovers the problem during a compliance check. The timing and quality of disclosure matter: a full and clear explanation tends to be treated more favourably than a partial admission that is corrected only after HMRC asks questions.

How multiple penalties can stack up

It is possible for a single episode of non-compliance to create multiple consequences. Consider a simple example: a business submits a VAT return late and also pays late. Under a points-based system, the late return could create a point (and potentially a penalty if the threshold is reached). Separately, late payment could trigger percentage-based penalties and interest. If the return also contains an inaccuracy that understates VAT due, an inaccuracy penalty might apply as well.

Another example involves digital record-keeping failures. If records are incomplete, the business may file based on estimates. If those estimates understate tax, the business may face inaccuracy penalties. If HMRC cannot verify the numbers due to missing records, HMRC might issue assessments and could also consider record-keeping penalties. What started as a “systems problem” can become expensive if it is not corrected quickly.

The lesson is that penalty exposure is not only about the headline tax. Penalties can arise from different angles—timeliness, payment, accuracy, and record quality—and the combined effect can be much larger than expected.

Common MTD error scenarios and the likely penalty pathways

To make the landscape more tangible, here are several common scenarios and how they tend to map to penalty regimes.

Scenario 1: You file late once, but pay on time. The likely consequence is late submission points (and possibly no financial penalty if you are below the threshold). Payment penalties generally should not arise because tax was paid by the due date.

Scenario 2: You file on time, but pay late. You may avoid submission points, but you can still face late payment penalties and interest if you pass the relevant trigger dates. A Time to Pay arrangement can be crucial here.

Scenario 3: Your software link fails on the deadline day and you cannot file. If you miss the deadline, you may still receive a late submission point. You might later argue reasonable excuse, but success depends on evidence and on whether you acted promptly to file as soon as possible.

Scenario 4: Incorrect VAT codes cause consistent under-declaration for several periods. This is a classic inaccuracy scenario. Penalties depend on behaviour and disclosure. If you discover the problem and correct it quickly, you may reduce penalty exposure. If HMRC finds it, penalties can be higher.

Scenario 5: You keep records digitally but break digital links by copying totals manually between systems. The immediate consequence might not be a percentage penalty. But it increases compliance risk, and HMRC can treat it as a failure to meet MTD requirements. It can also contribute to broader record-keeping issues if the audit trail is unclear.

Scenario 6: You miss multiple submissions over a year. Under a points-based system, you can reach the threshold and receive a fixed penalty. Continued late submissions can then trigger further penalties, making persistent non-compliance costly.

How HMRC typically approaches penalty decisions

While individual cases vary, penalty decisions tend to follow a pattern. HMRC will identify the obligation that was breached and then apply the relevant penalty framework. The biggest drivers of outcome tend to be:

The objective facts: when the submission was due, when it was filed, when payment was due, when it was paid, and what the correct tax should have been.

The compliance history: whether this is a one-off or part of a pattern.

The taxpayer’s behaviour: whether reasonable care was taken and whether the error was careless or deliberate.

The quality of engagement: whether the taxpayer cooperated, responded promptly, and provided clear information.

The presence of a reasonable excuse: supported by evidence and followed by prompt corrective action.

Because MTD increases the use of digital data and software interfaces, there is often a clearer timeline of events—authorisations, submissions, acknowledgements, and software logs. This can help taxpayers prove what happened, but it can also make it easier to see when processes were neglected.

Reducing risk: practical steps to avoid penalties

A strong penalty-prevention strategy focuses on design, not heroics. The aim is to build a system where compliance happens routinely and problems are detected early.

1) Create a compliance calendar with buffer time. Do not aim to file on the deadline day. Build in time for software updates, unexpected staff absence, or reconciliation delays.

2) Reconcile before you file. A quick sense-check is not enough. Bank reconciliations, VAT control account checks, and a review of unusual transactions can catch errors before submission.

3) Lock down tax codes and mappings. Many inaccuracies originate in configuration rather than arithmetic. Restrict who can change VAT codes and ensure changes are reviewed.

4) Maintain digital links and an audit trail. If you use spreadsheets, ensure the flow of information meets digital link requirements for your regime. Avoid manual copying of totals where rules require digital transfer.

5) Monitor authorisations and software connectivity. Set reminders to check that the software is still authorised to connect to HMRC and that any agent permissions are in place.

6) Have a documented process for exceptions. Decide in advance how you will handle missing invoices, late expenses, refunds, and adjustments. Documenting the approach helps show reasonable care.

7) Act quickly when you find an error. Correcting and disclosing issues early can reduce penalty exposure and prevent problems from compounding over multiple periods.

8) If you cannot pay, engage early. Late payment penalties can be reduced by partial payment, early contact, and formal payment arrangements where appropriate.

Challenging a penalty: what to consider

If you receive a penalty, you are not necessarily stuck with it. There are typically routes to challenge or appeal, but success depends on how well you can support your position.

Key considerations include:

Check the basics first. Was the submission actually late according to HMRC’s records? Was the payment credited on time? In some cases, payments are made on time but allocated incorrectly or delayed by banking cut-offs.

Gather evidence. Software submission receipts, bank confirmations, screenshots, system incident logs, and internal emails can help establish what happened and when.

Explain the cause clearly. A vague explanation is less effective than a precise timeline: what the obstacle was, what steps were taken, and how quickly you complied once able.

Demonstrate reasonable care. If the issue is an inaccuracy, show the controls you had and what you changed to prevent recurrence.

Resolve outstanding compliance. For points-based systems, getting all submissions up to date and staying compliant may be part of the pathway to improvement and sometimes to resetting points over time.

Even where a penalty cannot be fully removed, engaging constructively can sometimes lead to reductions, especially where disclosure is complete and cooperation is strong.

Why MTD can feel stricter even when the rules are familiar

Many of the penalty frameworks that apply in an MTD context existed before MTD. Yet businesses often report that compliance feels stricter. There are a few reasons for that perception.

Deadlines become more visible and more frequent. Digital reporting creates routine touchpoints. If you are not organised, you encounter deadlines more often and feel the pressure more acutely.

Automation amplifies both accuracy and error. When systems are set up correctly, they reduce mistakes. But when something is misconfigured, the same error can repeat quickly across many transactions.

Digital trails make patterns easier to spot. Repeated late submissions, repeated adjustments, or unusual patterns can stand out more clearly when data is handled digitally.

Process failures are treated as compliance failures. In a paper world, a business might have kept records in various ways and still “made it work.” Under MTD, the method itself can be part of the obligation, so procedural weaknesses can have direct consequences.

Key takeaways: the real penalty risks under MTD

The penalties for “errors under Making Tax Digital” are best understood as a set of linked regimes rather than one single MTD fine. Late submissions can trigger points and fixed penalties once thresholds are reached. Late payments can trigger percentage penalties and interest based on how long the tax remains unpaid. Incorrect figures can lead to inaccuracy penalties that depend heavily on behaviour and disclosure. Failures in digital record keeping and digital links can increase risk and may lead to record-keeping penalties and more HMRC attention.

Most penalty problems are preventable with straightforward operational discipline: file early, reconcile properly, lock down configurations, maintain digital links, monitor software authorisations, and address issues quickly when they arise. If something does go wrong, evidence and prompt action matter. The sooner you can show what happened and that you acted responsibly, the better your chances of reducing the impact.

Ultimately, MTD shifts compliance from a periodic administrative task into a continuous process. The penalties are not designed to punish honest mistakes in isolation, but they can be costly where delays and errors become habitual or where digital requirements are ignored. Treating MTD as an ongoing system—rather than a last-minute filing chore—is the most reliable way to stay out of penalty trouble.