How to Avoid Issues and Possible Financial Penalties for Making Tax Digital

Now that Making Tax Digital (MTD) is well on its way to becoming mandatory, it is vital that people who are self-employed, landlords, and owners of small businesses, understand the correct procedures for logging their tax information. By not understanding these processes, the potential for encountering issues and financial penalties, through MTD, are extremely high. One of the problems though is knowing what issues to look out for, so it’s easier to avoid them and ensure you’re using the Making Tax Digital service correctly.

With that in mind, Brearley & Co.’s taxation experts have put this guide together that highlights common MTD issues people can face and ways to avoid them escalating leading to fines. And remember, if you’ve got any questions about Making Tax Digital or tax in general, get in touch with us today and our friendly team are here to help you.

What are the common issues related to Making Tax Digital?

The key issues that lead to penalties through Making Tax Digital are:

• Late submission of tax information
• Not maintaining digital tax records on compliant software

But before we go into more detail about these common issues, it’s important to explain that the system Making Tax Digital uses for delivering financial penalties is different to the one used previously for self-assessments.

The Making Tax Digital penalty system

For Making Tax Digital, HMRC has created a new and more flexible penalty system than the previous Self Assessment penalty regime. The new penalty process is designed to be much fairer to self-employed individuals and small businesses, which have limited time to devote to tax accountancy. MTD now uses points, as well as percentages, to create fines. So, although you can still face fines, people registered on Making Tax Digital get several chances and leeway before they receive one.

It’s important to note though that each of the key issues we listed earlier on (and will soon discuss in more detail) have individual penalty criteria. So, although people have more flexibility, not all the issues follow the same penalty structure. HMRC will notify you by letter if you have received a penalty.

The penalties related to certain Making Tax Digital issues

There are three common issues related to Making Tax Digital that eventually result in penalties, with each having its own criteria.

Issue 1. Submitting your tax information late

The most common issue people faced before MTD was not submitting their tax information on time. This hasn’t changed now Making Tax Digital has been launched, but luckily the consequences are not as extreme. To counteract late submissions, HMRC’s penalty point thresholds are set against submission frequencies. What this means is that if a taxpayer only submits their tax return once a year, but a small business files their tax information each quarter, the penalty points thresholds fairly reflect this.

However, if the thresholds are met, HMRC will issue a £200 penalty and then issue more £200 penalties if tax information continues to be submitted late. But, if self-employed individuals or those using MTD comply with the deadlines and frequency for tax submissions, their threshold points will be reset to zero every 24-months. But, if taxpayers fail to submit their outstanding details, from the ones that led to their original penalty points, these individual’s penalty points will remain on their account. The submission frequency, penalty thresholds, and compliance periods are:

Although HMRC does issue penalties for late submissions, during 2026 and 2027, HMRC will not be issuing any penalties for late quarterly submissions. This is because HMRC is seeing this as the transitional year for individuals to become accustomed with the systems.

Issue 2. Late payment of tax notices

The next big issue people can face regarding MTD is not paying their tax bill before or on the day of the deadline. The way HMRC is managing this is by charging individuals interest and overdue payment penalties. If people pay their tax bill within 15 days of the deadline, they will not receive a penalty, but they’ll need to pay any interest HMRC has put against the amount. If the tax hasn’t been paid after 15 days, people will receive a 3% penalty against the tax amount, which will increase by another 3% if it’s not paid in 31 days.

If after 31 days the tax amount still hasn’t been paid, an additional penalty charge will be added, which increases daily, at a rate of 10%. If taxpayers know they may incur additional charges by not being able to pay inside of the initial 15-day deadline, you should contact HMRC straight away. It is worth noting that HMRC is increasing the penalty amounts in the 2027 and 2028 tax year, so keeping a close eye on how these will change over time is essential.

Issue 3. Not maintaining digital tax records on compliant software

One of the fundamental issues people can face regarding Making Tax Digital is individuals not maintaining their tax records digitally and correctly on complaint software. The consequences around tax information being inaccurately recorded and submitted are serious, with fines ranging between £400 to £3,000! So, it’s vital to use compliant digital tax software regularly and correctly to avoid receiving hefty financial penalties.

Can people appeal if they have received an MTD penalty?

A frequent question people ask is can they appeal a Making Tax Digital penalty if they receive one? The answer is yes. The letter you receive explaining your penalty contains information on how you can appeal it. You need to provide evidence within 30 days, in conjunction with a “reasonable excuse” that can include:

• Health or personal issues such as a bereavement
• System problems such as your MTD compliant software failing to connect
• Unexpected business events such as property theft preventing you from working

If an external agent manages your Making Tax Digital details and they fail to submit your information on time or it is incorrect, this is another “reasonable excuse” you can appeal.

Four effective solutions to help avoid issues and penalties from Making Tax Digital

Now we’ve explained what issues to look out for, and the penalties individuals can face from MTD, here are four solutions to help avoid them occurring in the future.

Solution 1. Keep all your records up-to-date and on the digital system

As Making Tax Digital relies heavily on real-time financial information, it’s vital that all your tax details are up to date. A good tip is to block out some time, each week, to include all your tax information on your online system, ready to submit ahead of your monthly, quarterly, or annual deadline.

Solution 2. Use a calendar to help you keep track of deadline dates

Following on from keeping all your records as current as possible, a calendar is a great solution for helping you keep track of tax year dates and submission deadlines. The last thing you want to do is submit the information at the last minute and risk being late. Alongside this, see the official deadline as a “hard deadline” and try to submit your information to HMRC a calendar week early. This is so you can be sure you won’t encounter any technical problems and time to check the information thoroughly.

Solution 3. Link your digital bank account to your MTD-compliant software

Rather than having your business bank account and MTD software separate, we advise linking the two pieces of software together. This means there’s less risk of financial information being lost and your MTD software is updated in real-time. Make sure to double-check the amounts when the submission deadline arrives though.

Solution 4. Check your digital links every quarter or six months

It’s great that you can link your bank account and software directly to one another, but problems can still occur without realising it. That’s why it’s good to get into the habit of auditing your digital links every four or six months, just to check the information is being fed through correctly, so you can avoid receiving any fines.

How Brearley & Co. can ensure you avoid Making Tax Digital issues and penalties

Much like when registering for Making Tax Digital, although avoiding charges and financial penalties sounds easy, getting used to managing your taxes in a new way to stop these being issued can be tricky. As with any new system or way of working, our advice is that the best thing to do if you’re struggling is to ask.

At Brearley & Co., our taxation experts can answer any questions or concerns you have about MTD and provide effective solutions to help you avoid fines. If you want to take stronger control of your business finances, contact our friendly team and book a meeting at one of South Yorkshire offices, giving you the confidence to use the Making Tax Digital service successfully.