Making Tax Digital (MTD) and HMRC VAT Penalty Rules

Making Tax Digital for VAT was introduced in April 2019 and reached full enforcement in April 2022. By 2026 it is the mature default regime, with active points-based penalty enforcement, percentage late-payment penalties, and increasing scrutiny of digital record quality. For UK VAT-registered businesses, the practical compliance landscape now turns on understanding when points trigger fines, how the percentage late-payment tiers stack, what counts as a "broken digital link," and the strict 30-day window for penalty appeals.

The points-based late submission system

Late VAT return submission attracts points under the post-2023 regime:

• One penalty point per missed VAT return.
• Points cap depends on submission frequency: quarterly = 4 points, annual = 2 points, monthly = 5 points.
• When the points cap is reached, a £200 financial penalty triggers.
• Each subsequent missed return = another £200 penalty (no further points needed).
• Points expire after a "compliance period" of 24 months for quarterly filers (12 months for monthly).

Late payment penalties: percentage tiers

Late payment interest also applies separately: charged at the HMRC prevailing rate (currently 7.75% in 2026) from the day after the due date until paid. Interest applies even where Time to Pay is agreed.

Digital record keeping rules

Under MTD, VAT records must be:

1. 1Kept digitally (cloud accounting software, spreadsheet with bridging plug-in, or dedicated MTD app).
2. 2Records for 6 years from the end of the relevant VAT period.
3. 3Source data linked digitally to the VAT return submission.
4. 4Each individual sale and purchase recorded with date, value, VAT rate, supplier/customer.
5. 5Manual transcription between digital systems is prohibited (must be digital link).

Broken digital links: what triggers a fine

HMRC defines a digital link as data flowing between two systems without manual intervention. Examples that ARE digital links:

• API integration between Shopify and Xero.
• CSV import using software automation (no manual re-entry).
• XML export from one system imported into another.
• Bridging software plug-in pulling cells directly from a spreadsheet.

Examples that are NOT digital links (broken):

• Manual re-typing of figures from one system to another.
• Copy-paste between Excel sheets that are then transcribed.
• Paper printout from one system manually keyed into another.
• Email of figures from one team to another for manual entry.

Appealing a VAT penalty: the 30-day window

Penalty appeals follow a strict timeline:

1. 1Penalty notice issued by HMRC.
2. 2Within 30 days of the notice: appeal in writing to HMRC, citing reasonable excuse or technical grounds.
3. 3HMRC review (typically 4-8 weeks): may withdraw, reduce, or maintain penalty.
4. 4If maintained: 30 days to appeal to First-tier Tribunal.
5. 5Tribunal hearing: 4-12 months later, depending on case complexity.
6. 6Reasonable excuse standards: serious illness, system failure, postal disruption — NOT "I forgot" or "I didn't have time."

VAT652: correcting errors above £10,000

Voluntary disclosure of VAT errors:

• Errors below £10,000 (or below 1% of Box 6 turnover, capped at £50,000): correct on the next VAT return, no separate disclosure needed.
• Errors above £10,000 (and above the 1% threshold): submit form VAT652 to HMRC.
• Voluntary disclosure: typically attracts reduced penalties (0-30% range) vs HMRC-prompted disclosure (15-100%).
• Documentation: explanation, calculation, proposed adjustment, supporting evidence.
• Time limit: 4 years from the period in which the error occurred.

MTD exemption applications

A small population can apply for exemption:

• Age, disability or remoteness preventing digital filing.
• Genuine religious objection.
• Bankruptcy or insolvency proceedings.
• Application via HMRC; until granted, the business remains in MTD.
• Mere preference or unfamiliarity with software is NOT grounds for exemption.