Making Tax Digital and HMRC’s New Penalty Regime: A Practitioner Briefing

Making Tax Digital for Income Tax is no longer a distant prospect. From April 2026, the first wave of taxpayers, those with qualifying income above £50,000, face mandatory digital filing and quarterly reporting, coupled with a fundamentally different penalty regime that replaces the familiar fixed charges of Schedule 55 and Schedule 56 with a proportionate, points-based system. This briefing explains the mechanics, identifies the interaction with existing penalty law and sets out what advisers must do to protect their clients from a 2026 compliance cliff-edge.

The Existing Penalty Framework

Before examining what changes, it is essential to understand the current regime that is being replaced or supplemented, for MTD taxpayers.

Schedule 24 FA 2007, Inaccuracy Penalties

Schedule 24 to the Finance Act 2007 imposes penalties for inaccuracies in returns and documents submitted to HMRC. It applies to all major taxes from 1 April 2009. The penalty is a percentage of the “potential lost revenue” (PLR), the tax that would have gone unpaid if the error had not been discovered. The percentage depends on the behaviour of the taxpayer (careless, deliberate, deliberate and concealed), whether disclosure was unprompted or prompted and the quality of that disclosure.

Schedule 24 penalties are not replaced by the MTD regime. They continue to apply to inaccurate MTD quarterly updates and annual returns just as they apply to conventional self-assessment returns today. The MTD changes affect only the late filing and late payment penalty regimes.

Schedule 55 FA 2009, Late Filing

Schedule 55 to the Finance Act 2009 imposes fixed penalties on individuals within self-assessment who fail to file their returns by the statutory deadline:

• £100 for missing the initial deadline (31 January online; 31 October paper)
• Daily penalties of £10/day for up to 90 days (maximum £900) after three months of continued failure
• A further penalty of the greater of 5% of the tax due or £300 after six months
• A further penalty of the greater of 5% of the tax due or £300 after twelve months (though higher penalties apply where information is deliberately withheld)

This regime applies to conventional self-assessment and continues to apply to taxpayers who are not yet within MTD mandation. Once a taxpayer is mandated into MTD, the Sch 55 regime is replaced by the points-based system described below.

Schedule 56 FA 2009, Late Payment

Schedule 56 imposes fixed percentage penalties for late payment of income tax: 5% of the unpaid tax if still outstanding at 30 days, a further 5% at six months and a further 5% at twelve months. This fixed-charge approach is replaced under MTD by the proportionate two-stage regime.

The New MTD Late Payment Penalty Regime

Finance Act 2021 provides for a new late payment penalty regime for MTD taxpayers, replacing the Schedule 56 structure. As announced at Spring Statement 2025, the rates increased for taxpayers joining MTD from April 2025 onwards:

• First penalty: 3% of the tax still outstanding at day 15 after the due date
• Second penalty: A further 3% of the tax outstanding at day 30
• Daily accruing penalty: 10% per annum of the tax outstanding on and after day 31 (previously the rates were 2%, 2% and 4% respectively before the Spring Statement 2025 increase)

The philosophy of the new regime is proportionality: the penalty grows with the amount outstanding and the length of delay. A taxpayer who pays within 15 days of the due date faces no late payment penalty at all. A taxpayer who pays promptly after the first penalty notice but before day 30 faces only the 3% first penalty. The incentive structure is designed to encourage early engagement with HMRC rather than prolonged negotiation of the debt.

Time to Pay and the Penalty Clock

Critically, if a taxpayer agrees a Time to Pay (TTP) arrangement with HMRC before day 15, no late payment penalty is charged provided the TTP is maintained. This makes early contact with HMRC essential where a client genuinely cannot pay on time. Waiting until after a penalty has been charged removes this route.

The Points-Based Late Submission Regime

The existing fixed-penalty structure of Schedule 55 is replaced for MTD taxpayers by a points-based system. The mechanics are:

1. Each late submission (whether of a quarterly update or the annual return) accrues one penalty point.
2. Once the taxpayer’s accumulated points reach the threshold for their submission frequency, a £200 penalty is charged.
3. Each subsequent late submission beyond the threshold also incurs a £200 penalty.
4. Points expire after a set period of compliance:
   • For quarterly submissions: points expire if the taxpayer submits on time for 12 consecutive months
   • For annual submissions: points expire after 24 months of compliance

The penalty thresholds by submission frequency are: 2 points for annual filers; 4 points for quarterly filers (the MTD Income Tax default); 5 points for monthly filers. A client filing quarterly who misses four consecutive updates will have accumulated 4 points, triggering the first £200 penalty. The fifth late submission generates another £200 and so on.

MTD Income Tax Rollout Timetable

The mandation dates for MTD for Income Tax Self-Assessment (ITSA), incorporating the Spring Statement 2025 announcement, are:

• 6 April 2026: Sole traders and landlords with qualifying income (business or property) over £50,000 per year
• 6 April 2027: Those with qualifying income over £30,000 per year
• 6 April 2028: Those with qualifying income over £20,000 per year (Spring Statement 2025 extension)

Taxpayers who voluntarily joined MTD for Income Tax from 6 April 2024 are already subject to the new penalty regime from that date. General partnerships are expected to be brought within scope in a subsequent phase. Trusts, estates and other entities are not currently scheduled for mandation.

VAT: The New Regime Is Already in Force

For VAT, the equivalent changes to late payment and late submission penalties took effect from 1 January 2023. The old VAT default surcharge regime (under VATA 1994 s59) was replaced by:

• A new late payment penalty regime closely mirroring the income tax structure (though with the original pre-Spring Statement 2025 rates until taxpayers are brought within the new rates as they join MTD from April 2025)
• A new VAT late submission penalty regime using a points-based system equivalent to the income tax version

The VAT experience provides a useful data set for practitioners advising clients about the income tax transition. HMRC’s published data suggests the VAT points-based regime has been broadly effective at encouraging compliance without the perceived harshness of the old surcharge system.

Interaction with Schedule 24 FA 2007

A critical point often missed in commentary on the MTD penalty regime is that Schedule 24 inaccuracy penalties are not replaced. They continue to apply on top of the MTD late payment and submission penalties. The interaction can produce material cumulative exposure:

• A taxpayer who files an MTD quarterly update late and the update contains a careless inaccuracy faces both: the points-based late submission penalty and a Sch 24 penalty of between 0% and 30% of the PLR (for careless behaviour with prompted disclosure).
• A taxpayer who pays late and the underlying liability was understated faces both: the day 15/30/ongoing late payment penalties on the amount actually assessed and a Sch 24 penalty on the PLR attributable to the inaccuracy.

The Spring Statement 2025 consultation on behavioural penalties reform (published 26 March 2025) proposes two models for reforming Sch 24 itself, either simplifying the existing framework or a more fundamental redesign. This remains a consultation, not enacted law, but practitioners should track its progress given the substantial interaction with the MTD regime.

Suspension Provisions

Under para 14 of Sch 24 FA 2007, HMRC may suspend all or part of a penalty for a careless inaccuracy for up to two years, subject to the taxpayer meeting specified conditions designed to improve their future compliance. Suspension is only available for careless inaccuracy penalties, it is not available for deliberate or deliberate-and-concealed behaviour.

The Sch 24 suspension mechanism remains available under MTD for inaccuracy penalties on MTD returns. However, there is no equivalent suspension for MTD late payment or late submission penalties. This distinction matters: advisers negotiating with HMRC over a client’s compliance history should ensure they are correctly identifying which penalty type is in issue before asserting suspension rights.

Worked Example: Rental Income Landlord Filing Late in 2027

Consider a taxpayer with £55,000 of rental income per year who is mandated into MTD from April 2026. In the 2026–27 tax year, they miss their first quarterly update (due 5 August 2026) and the second quarterly update (due 5 November 2026), then file the third and fourth updates on time, but pay their January 2027 tax liability of £11,000 20 days late (21 February 2027).

• Late submission points: 2 points (two missed quarterly updates). As the threshold for quarterly filers is 4, no £200 penalty is charged, yet. The 2 points begin running against the compliance calendar.
• Late payment penalty: The tax was 20 days late. At day 15, a 3% penalty on the outstanding £11,000 is charged = £330. The tax is then paid on day 20, before the day 30 second penalty threshold. Total late payment penalty: £330.
• Total MTD penalty exposure: £330, plus 2 accumulating points which will generate a £200 penalty if 2 more quarterly updates are missed within the points expiry window.
• Comparison under old regime: Under Sch 56, the first £100 flat penalty for late payment would apply. The old Sch 55 daily penalties for late submission only kick in after 3 months, so 2 missed updates filed late might generate only the initial £100 penalty per update. The new regime is more immediately costly for late payment but the points system is more forgiving of isolated submission lapses than the old daily penalty accumulation.

Practical Advice for Practitioners

• Identify all clients with qualifying income above £50,000 now and confirm software compatibility and digital record-keeping capability before April 2026.
• For clients in the £30,000–£50,000 bracket, the April 2027 deadline is 12 months away from the first mandation wave, do not allow these clients to believe they have indefinite time.
• The new late payment penalties make Time to Pay discussions with HMRC before day 15 essential for clients who cannot pay on time. Coach clients to contact HMRC (or allow you to do so) at the earliest sign of payment difficulty.
• Review engagement letters to clarify responsibility for quarterly filing under MTD, many existing letters assume annual compliance.
• Assess clients’ systems for generating digital records compatible with MTD-approved software. Paper bookkeeping is no longer compatible with mandatory MTD once the client is in scope.
• Where a client already has accrued Sch 24 penalty exposure, consider whether suspension conditions can be set that overlap with MTD readiness improvements, killing two compliance birds with one stone.

Frequently Asked Questions