Making Tax Digital Penalties and How to Avoid Them

Team Nomi

May 15, 2025
4 minutes read

If you’re running a business or managing your own finances, you’ve probably heard about Making Tax Digital (MTD). It is an HMRC rule.

MTD means you must keep digital records and file returns using approved software. But if you don’t follow the rules, like missing a deadline or not using the right software, you could get Making Tax Digital penalties.

To help you avoid costly mistakes, here is are explanation of what MTD penalties are, how they work, and how to avoid them.

What is Making Tax Digital?

Making Tax Digital (MTD) is a UK Government programme that changes the way individuals and businesses report their taxes to HMRC. Instead of using paper records or manual filing, you must now keep digital records and submit tax returns using MTD-compatible software.

What are the main MTD rules?

To follow MTD properly, you must:

• • Keep digital records of your income and expenses
  • Use MTD-compatible software to send your returns to HMRC
  • Submit returns on time (e.g. every quarter for VAT)
    

These rules help HMRC reduce errors, improve accuracy, and make tax reporting quicker and easier for everyone.

MTD for VAT penalties

Under Making Tax Digital (MTD) for VAT, HMRC introduced a new penalty system for businesses that miss VAT return deadlines. This system aims to be simple and more consistent by using a points-based model instead of automatic fines.

The following are the different types of MTD for VAT penalties:

1. Late Submission Penalties

Since 1 January 2023, late submission penalties for VAT are no longer flat fees. Instead, HMRC gives you penalty points each time you miss a submission deadline.

Here’s how it works:

• • One point is added every time you miss a VAT return deadline.
  • When you reach a certain number of points, you get a £200 fine.
  • After that, every further missed deadline adds another £200 penalty.
    

The following are the Thresholds Before Fines Apply:

2. Late Payment Penalties

If you don’t pay your VAT on time under the Making Tax Digital (MTD) rules, HMRC will charge penalties. 

When Do Late Payment Penalties Start?

There are two stages of Making Tax Digital penalties depending on how late your payment is:

1. First Penalty – 15 Days Late

• • If your VAT payment is up to 15 days late, you won’t get a penalty.
  • If you still haven’t paid by day 16, HMRC charges a 2% VAT return penalty.
    

2. Second Penalty – 30 Days Late

• • If the VAT is still unpaid after 30 days, HMRC charges another 2% on the amount outstanding at day 30.
    

So if you pay after 30 days, the total penalty is 4% of the VAT owed.

Example of How It Works:

Let’s say you owe £1,000 in VAT and miss the payment deadline:

• • Day 1–15: No penalty if you pay within this time.
  • Day 16–30: 2% penalty = £20
  • Day 31+: Another 2% = £20
    Total penalty = £40
    

How to Avoid MTD for VAT Penalties

Avoiding penalties under MTD is all about staying organised and using the right tools.

Here’s how to stay compliant:

• • Use MTD-compatible accounting software
  • Set reminders for submission and payment deadlines
  • Keep digital records of all VAT transactions
  • Check your HMRC dashboard regularly for penalty points
  • Contact HMRC early if you’re struggling to pay

What Happens If You Ignore MTD Rules?

If you keep ignoring MTD rules, things get worse:

• • More penalty points and fines
  • HMRC may check your business more often
  • You may get extra charges or interest
  • It can hurt your business’s reputation

Ignoring VAT return penalties can lead to serious money problems.

If your business is VAT registered, using MTD-compatible software is essential to avoid Making Tax Digital penalties and ensure you meet every VAT return deadline. Nomi is the best software for this.

With Nomi accounting software, you can stay fully compliant with MTD for VAT rules. The platform is built specifically for UK businesses and accountants, offering smart automation, clear dashboards, and seamless integration with HMRC. You can experience its capabilities with a 30-day free trial. Nomi allows you to create, review, and submit VAT returns directly to HMRC in just a few clicks, removing the stress of missing deadlines or entering incorrect figures. Book a demo today to see how Nomi can convert your practice.

Note: This guide is based on our understanding of current tax rules and may change. It may not apply to your specific situation, so please seek professional advice if needed. Always check with a qualified expert to ensure you’re fully compliant.