What happens if I don’t comply with Making Tax Digital rules?

What “Making Tax Digital” is really asking you to do

Making Tax Digital (often shortened to “MTD”) is the UK government’s long-running programme to modernise the tax system by moving record keeping and reporting away from manual processes and into compatible digital software. In practical terms, it usually means: keeping certain tax records in digital form, using “MTD-compatible” software to submit information to HMRC, and maintaining “digital links” between the different parts of your record-keeping process so figures aren’t repeatedly retyped or copied-and-pasted in a way that breaks the digital audit trail.

For many people, the idea sounds straightforward: “I already do my VAT return online, so what’s the difference?” The difference is that MTD isn’t only about filing online; it’s about how your underlying records are kept and how they flow into submissions. HMRC expects the numbers on your return to come from digital records and to be transferred digitally. That’s why MTD can affect businesses that currently rely on spreadsheets with manual copy-and-paste steps, paper invoices, or a once-a-quarter scramble to assemble totals from bank statements and receipts.

If you don’t comply with MTD rules when they apply to you, the consequences can range from mild inconvenience to escalating penalties and time-consuming HMRC interactions. The impact also depends on the tax type (for example, VAT under MTD, and any other MTD regimes as they come into force), how long you remain non-compliant, and whether HMRC believes the failure is careless, deliberate, or repeated.

Who is most at risk of non-compliance

Non-compliance doesn’t always happen because someone is trying to dodge tax. Often it happens because the rules feel technical, the software landscape is confusing, or the business has internal processes that don’t match MTD requirements. The people most at risk tend to fall into a few categories.

Businesses using manual processes. If your bookkeeping is done on paper, or if you use a spreadsheet that requires retyping totals into a portal, the gap between “what you do now” and “what MTD requires” can be significant. The longer you continue with a non-digital process after MTD applies, the higher the risk.

Businesses with fragmented systems. Some organisations have separate systems for invoicing, expenses, payroll, and inventory. If data is moved between them manually, the “digital link” requirement can be breached, even if each system is digital on its own.

Newly registered or rapidly growing businesses. When you’re busy onboarding clients, hiring staff, or dealing with cash flow, compliance tasks can slip. MTD doesn’t pause just because the business is in a growth phase.

Landlords and sole traders who do their own accounting. If you’re juggling everything yourself, you may not notice a rule change until it becomes urgent. The risk increases when reporting obligations expand or when your income crosses thresholds that bring you into a digital regime.

Businesses that assume their agent will “handle it.” An accountant can help, but the responsibility still sits with the taxpayer. If the records aren’t kept digitally or the business doesn’t provide data in a way that meets MTD standards, the submission may not be compliant even if your accountant files on time.

The immediate practical consequences of not complying

The first impact of non-compliance is often operational rather than financial. People find themselves stuck at the point of submission. If you are required to use MTD-compatible software and you try to file using an older method, you may find it no longer works or you can’t complete the process as expected. This can lead to late submissions, rushed fixes, and mistakes.

Another immediate consequence is the stress and administrative burden of changing systems under pressure. Switching accounting software, setting up an agent authorisation, connecting to HMRC, importing data, and training staff all take time. Doing this calmly ahead of deadlines is one thing; doing it in a panic because a return can’t be filed is another. The risk of errors increases dramatically when the change is rushed.

Non-compliance can also create a “messy trail.” If you’ve been keeping paper records or using spreadsheets with manual adjustments, then later move to digital, you may have gaps that are hard to reconstruct. If HMRC queries your figures, you could end up spending hours trying to prove how numbers were calculated, which invoices were included, and which adjustments were made.

Financial penalties: how the risk can escalate

When people ask, “What happens if I don’t comply?” they often mean, “Will I get fined?” The honest answer is that the penalty risk depends on what you fail to do and how often. There are typically two big buckets of risk: late submission/late payment and record-keeping or process failures (such as not using compatible software or breaking digital links when they’re required).

Late submissions can trigger penalties even if you owe no tax for that period. That surprises many small business owners, but deadlines are about reporting, not just paying. If you cannot file because you aren’t set up correctly for MTD, the clock doesn’t stop. Over time, repeated late submissions can lead to escalating consequences, increased scrutiny, and more effort required to stay on top of compliance.

Late payment is a separate issue. You can be fully compliant with MTD software and still pay late; likewise, you might file late because you weren’t compliant with the submission method. In either case, late payment can add charges that grow with time, and it can create cash flow problems if you suddenly face an unexpected bill on top of the tax itself.

Process failures can lead to penalties too, especially if HMRC considers the behaviour careless or deliberate. For example, if a business continues to keep records in a way that does not meet the digital requirements when it is obligated to do so, that can be treated as a compliance failure. Even where initial enforcement is light, the longer the non-compliance continues, the weaker your position becomes if HMRC asks why you didn’t adapt.

What HMRC is likely to do first

In many cases, the first sign of trouble isn’t a penalty letter; it’s a nudge. You might receive reminders, notices, or prompts that you need to sign up, use compatible software, or change how you submit returns. These communications can be easy to ignore when you’re busy, but they are often early warnings that your current process is out of step with the rules.

HMRC may also contact you if something looks inconsistent: returns filed in an unexpected way, missing submissions, or data patterns that don’t fit your previous behaviour. An enquiry doesn’t necessarily mean you’ve done something wrong, but once HMRC is looking, you’ll have to spend time responding and providing evidence.

Even if the initial contact is polite, it can be disruptive. You might need to gather records, explain your process, confirm what software you use, and demonstrate that your figures are supported by underlying transactions. If your records are scattered across paper files, email attachments, and ad-hoc spreadsheets, this can be more painful than it needs to be.

Investigations and compliance checks: why digital records matter

One of the less discussed consequences of not complying with MTD is the increased friction during compliance checks. Digital record keeping can make it easier to provide a clear picture of income and expenses. When you remain non-compliant, your records may be less structured, harder to verify, and more vulnerable to questions about completeness or accuracy.

If HMRC requests evidence, they may want to see not only the totals but the transactions behind them. If your figures were calculated by hand, you may need to show how you arrived at the totals and demonstrate that nothing was omitted. If you use spreadsheets but repeatedly retype numbers into another system, you may struggle to show an unbroken audit trail.

This doesn’t automatically mean HMRC will assume wrongdoing, but it does mean you can spend more time proving the basics. The risk isn’t only penalties; it’s the opportunity cost of your time and the potential need to pay professional fees to get things in order.

“Digital links” and the hidden ways people accidentally breach MTD

Many businesses believe they are compliant because they use some form of software and submit returns electronically. But compliance can be undermined by the way information is moved around internally.

For example, consider a business that exports sales data from a point-of-sale system into a spreadsheet, then manually edits the spreadsheet, then copy-and-pastes totals into accounting software, and finally files a return. Even though every step involves a digital tool, the manual copy-and-paste or retyping can break the digital link requirement. The business may not realise that this is a problem until an adviser flags it or HMRC asks about the process.

Another common scenario is using multiple spreadsheets maintained by different staff members, then combining them manually at quarter end. The more manual handling, the more room there is for error. Even if your numbers are “right enough,” the process may not meet the standard expected under MTD rules when they apply.

Accidental breaches are especially common during transitions. A business might adopt new software but keep old habits, like manually summarising invoices rather than importing them. Or staff might not be trained, leading to workarounds that undermine digital compliance. The longer these habits persist, the greater the risk that non-compliance becomes systemic.

Late filing because of tech issues: are you still responsible?

A frequent worry is, “What if the software fails, the internet is down, or we can’t connect to HMRC?” In practice, you are still responsible for filing on time. There may be routes to explain exceptional circumstances, but relying on that is risky. A safer approach is to build resilience into your process: don’t leave submissions to the last minute, keep access credentials secure and documented, and ensure more than one person knows how to run the filing process.

If you do experience technical issues, you’ll want to document them. Keep screenshots, error messages, and notes about dates and times. This won’t guarantee that a penalty is waived, but it helps demonstrate that you acted reasonably and tried to comply. The key is showing that the failure wasn’t due to ignoring the rules or repeatedly leaving things too late.

What happens if you keep filing “the old way”

If MTD applies to you and you continue to file using an older method (or try to), a few outcomes are possible depending on the system and what is still available. In some cases, the old method may simply not work. In other cases, you might manage to submit something, but it could be treated as non-compliant with the requirement to use MTD-compatible software and maintain appropriate digital records.

Even if a submission goes through, it doesn’t necessarily mean you’ve met the underlying obligations. Think of it like paying for a train ticket: walking onto the train might be possible, but it doesn’t mean you’ve complied with the ticket requirement. If a later check reveals that you were required to use a specific process and didn’t, you can still face consequences.

Another danger of “old way” filing is that it can give false confidence. You might assume that because you filed, everything is fine. Meanwhile, you may be accumulating risk in the background. If you later have to demonstrate compliance, you may have to rebuild records, implement software mid-year, and explain why you didn’t adopt the required process sooner.

Impact on your accountant, bookkeeper, or internal finance team

Non-compliance doesn’t just affect your relationship with HMRC; it affects your relationship with the people who help you run the business. Accountants and bookkeepers can only work efficiently when they receive data in a consistent and reliable format. If your records are incomplete, late, or non-digital, they may need to spend more time cleaning up, which increases fees and delays decision-making.

For businesses with internal finance teams, non-compliance can create bottlenecks. Staff may be forced into repetitive manual tasks, such as rekeying data, chasing receipts, and reconciling mismatched totals. This reduces time available for useful work like cash flow forecasting, budgeting, and advising management.

There is also a governance angle. Directors have duties to keep proper accounting records. While MTD is a tax framework rather than a company law framework, it pushes businesses toward better record keeping. Persistently ignoring it can look like a broader weakness in financial controls, which can matter if you seek investment, apply for finance, or undergo due diligence.

Cash flow and planning problems that grow over time

Many businesses treat tax compliance as a periodic task: do the return, pay the bill, move on. MTD nudges businesses toward more continuous record keeping, which can improve visibility of your finances. If you don’t comply and keep running on ad-hoc processes, you may lose the chance to catch problems early.

For example, businesses that keep up-to-date digital records can more easily see whether VAT is likely to be payable, whether expenses are rising, or whether a particular product line is becoming less profitable. If you wait until the end of the period and then patch together numbers, you may discover too late that the tax bill is higher than expected.

This can create a cycle: late or rushed bookkeeping leads to late filing; late filing leads to penalties; penalties strain cash flow; strained cash flow makes it harder to invest in better systems; and the business remains stuck. Compliance isn’t just about avoiding punishment; it can affect your ability to run the business calmly.

Reputational and commercial consequences

It might seem like tax compliance is a private matter between you and HMRC, but it can have outward effects. Some lenders and suppliers ask for evidence of tax compliance or up-to-date accounts. If you are repeatedly late or under scrutiny, it can complicate applications for finance or credit terms.

If you work in sectors where compliance culture is important—such as government contracting, regulated industries, or professional services—poor tax processes can feed into a perception of weak administration. Even if no one sees a specific HMRC letter, operational chaos around tax deadlines can spill into missed client deadlines, late supplier payments, and staff stress.

For sole traders and landlords, the reputational impact may be smaller, but the personal impact can be larger. When tax issues pile up, they consume attention and can feel overwhelming. This can affect your confidence, your willingness to grow, and your overall financial wellbeing.

Can HMRC force you to comply?

HMRC has powers to enforce tax rules, and MTD is part of the compliance framework. In practical terms, enforcement often starts with communication and escalates if the problem persists. If you are in a category that is required to use MTD-compatible software, HMRC expects you to do so. Continued non-compliance can lead to further action, including penalties and closer monitoring.

It’s also worth remembering that “force” can be indirect. If the only submission route available is through compatible software, the system itself pushes you into compliance. If you don’t adapt, you may miss filings and trigger penalties. So while you might not receive an immediate instruction to install software, the practical requirement remains.

Reasonable excuses and mitigation: what helps and what hurts

When someone has failed to comply, the next question is often, “Can I explain it?” There are situations where a failure is not treated as harshly, particularly when it is genuinely outside your control. However, “I didn’t know” is not always a strong defence, especially if the rules have been in place for your tax type and circumstances for some time.

What tends to help is evidence of reasonable behaviour: trying to sign up on time, seeking advice, attempting to use software, keeping records as best as you can, and addressing problems promptly when you become aware of them. If you can show that you took compliance seriously and acted as soon as practical, you are in a better position than if you ignored reminders and hoped the issue would go away.

What tends to hurt is repeated failure, inconsistent stories, missing records, and a pattern of last-minute behaviour. Even if there was a genuine issue, failing to act once it becomes clear can shift the situation from “unfortunate” to “careless.”

If you’re already non-compliant: the risks of doing nothing

Doing nothing is the worst option, because it compounds problems. Every reporting period that passes adds more returns to fix, more records to reconstruct, and potentially more penalties. It also increases the chance that HMRC will view the situation as persistent rather than accidental.

There is also a psychological effect: the longer a compliance problem lingers, the more people avoid it. They stop opening letters, stop logging into accounts, and feel stuck. That makes it harder to recover. Even if the original issue was small—like failing to connect software correctly—the accumulated backlog can become intimidating.

If you suspect you’re non-compliant, the most practical approach is to move quickly to stop the bleeding: get set up to submit correctly going forward, then work backwards to resolve any missed filings or incorrect processes. This is often easier than trying to “catch up” using the same flawed method that caused the problem.

Steps to reduce penalties and get back on track

If you’re worried you haven’t complied with MTD rules, there are several actions that typically reduce risk and make recovery smoother.

1) Identify exactly which obligations apply to you. MTD requirements vary depending on the tax type and your circumstances. Clarify what you are required to do now, not what you think might apply. Non-compliance often starts with misunderstanding which regime you fall under.

2) Move to compatible software as soon as possible. Choose software that fits your business size and complexity. For a small operation, simple bookkeeping software may be enough. For a more complex business, you may need a system that integrates invoicing, expenses, inventory, and bank feeds.

3) Fix the record-keeping process, not just the submission method. Filing through software is only part of the job. Make sure your day-to-day process captures the required data digitally, and that figures flow through your system in a compliant way.

4) Create a clear internal routine. Set weekly or monthly tasks: reconcile bank transactions, upload receipts, review VAT codes, and check for anomalies. Regular routines reduce end-of-period panic and help you spot problems early.

5) Keep evidence of what you did and when. If you’re catching up, keep notes about the changes you’ve made: which software you adopted, when you started using it, and how you corrected past issues. If HMRC ever asks, you can show a timeline of responsible action.

6) Consider professional support if the situation is complex. If you have multiple income streams, partial exemption, international transactions, or years of disorganised records, a professional can save you time and reduce risk. The cost may be less than the cost of errors and penalties.

Common myths that lead people into trouble

Myth 1: “If I don’t owe anything, it doesn’t matter.” Reporting obligations can still apply even when the tax due is small or nil. Missing a filing deadline can still create problems.

Myth 2: “I use spreadsheets, so I’m digital.” Spreadsheets can be part of a compliant process, but if you retype or copy-and-paste figures into another system in a way that breaks digital links, you may not meet the standard expected when MTD applies.

Myth 3: “HMRC will tell me exactly what to do.” HMRC provides guidance and communications, but it won’t design your internal process. You are expected to ensure your method is compliant.

Myth 4: “I’ll fix it next quarter.” This often turns into “next year.” Delay increases the risk of penalties and makes the eventual fix harder.

How to future-proof your approach

Even if you’re compliant today, the broader direction of travel is toward more digital reporting. A sensible approach is to build a system that can evolve rather than one that barely meets the minimum.

Start by choosing software with a good track record of updates and integrations. Make sure you can export data, integrate bank feeds, and handle the types of transactions you commonly do. If you work with an accountant, align your software choices so they can access the data efficiently.

Then focus on discipline: record transactions promptly, attach supporting documents digitally, and reconcile regularly. Many businesses find that once they adopt consistent habits, the compliance burden decreases because the work is spread across the month rather than concentrated at the deadline.

Finally, build a small buffer around deadlines. Aim to finalise figures and run reviews before the last week. That way, if something goes wrong—software access issues, missing invoices, staff sickness—you can still file on time without panic.

What to do if you feel overwhelmed

If MTD compliance feels intimidating, you’re not alone. The combination of technical language (“digital links,” “compatible software”), changing processes, and tax deadlines can be stressful. The most effective way to reduce that stress is to break the task into small steps and focus on what you can control.

Begin with one clear objective: ensure the next submission is made correctly using the required route. Once you have a compliant process for future periods, you can work on improving the quality of your records and cleaning up any backlog. Trying to perfect everything at once often leads to paralysis.

It also helps to be honest about your constraints. If you are time-poor, choose software that automates as much as possible, like bank feeds and receipt capture. If you are not confident with technology, consider training or support. The goal is to reduce the chance of repeated mistakes, not to become an accounting expert overnight.

Bottom line: what happens if you don’t comply

If you don’t comply with Making Tax Digital rules when they apply to you, the consequences can start small—missed submissions, submission difficulties, confusing communications—but can grow into late filing and late payment penalties, increased HMRC attention, and a significant administrative burden to fix past periods. Non-compliance can also make it harder to run your business: poorer visibility over finances, more time spent reconstructing records, higher professional fees, and unnecessary stress around deadlines.

The best way to protect yourself is to treat MTD as a process change, not a one-off filing requirement. Use compatible software, keep the right records digitally, ensure data flows through digital links where required, and build routines that keep your books current. If you are already behind, act quickly to get compliant going forward and then work backwards to resolve the past. The sooner you address it, the easier it is to reduce risk and regain control.