Making Tax Digital for ITSA Penalties
Making tax digital for ITSA is bringing in big changes to the way sole traders and landlords declare their income to HMRC.
Along with the new digital approach to submitting tax information to HMRC a new MTD penalty system will be used.
The making tax digital penalty system will replace the self assessment penalty system for those who have to comply with MTD.
MTD for ITSA is meant to be going live for sole traders and landlords with an income of more than £50,000 in April 2026 and income of more than £30,000 in April 2027.
Our Making Tax Digital guide is available to help you learn more about MTD for ITSA and VAT.
HMRC have made an effort to make the MTD penalty system fairer and less severe in cases where legitimate short term issues occur.
What are the MTD for ITSA late penalty fines?
The MTD penalty system uses points to decide the type of fine which applies to you. There are different MTD penalties for MTD for ITSA and MTD for VAT.
The penalty points system permits so many points before a penalty is generated. If you meet a penalty points threshold you will then be subject to the appropriate penalty.
Basically you are allowed so many points before an automatic filing penalty is generated.
In the main 1 point is accrued every time a submission deadline is missed which includes quarterly reporting, end of period statements (EOPS) and final declarations.
A penalty can also be imposed for not using HMRC compatible software when making your submissions.
The threshold for MTD for ITSA penalties depends on the type of submission you are making:
- MTD for ITSA quarterly submissions:
A £200 penalty after four points have been accrued.
- MTD for ITSA monthly submissions:
A £200 penalty after five points have been accrued.
- MTD for ITSA annual submissions:
A £200 penalty after two points have been accrued.
Will making tax digital penalty points expire?
A making tax digital penalty expires after two years from the month after you received the point. The penalty point will only expire if you are under the penalty threshold.
If you have reached the penalty threshold a late penalty can only expire after a defined period of time in which you meet every submission deadline.
HMRC calls this process expiry of points for good compliance and let’s them reset your points as a reward.
The timescale needed to meet every submission deadline for a penalty to expire:
- 12 months for quarterly submissions.
- 6 months for monthly submissions.
- 24 months for an annual submission.
All of the penalties are automatically generated but you can appeal any late penalties or points if you have a reasonable excuse as defined by HMRC guidance.
HMRC have a reviews and appeals process for you to challenge late points or penalties under MTD.
What are the MTD late payment penalties?
HMRC are introducing a new late payment penalty system under MTD for ITSA which are in addition to any late filing penalties.
If you don’t pay the tax you owe to HMRC on time the following MTD for ITSA penalties will be imposed:
- Tax paid up to 15 days after due date: No penalty.
- Tax due not paid from day 16 up to day 30: A penalty of 2% of the tax due.
- Tax due not paid from day 31 of due date: A penalty of 4% of the tax due which is applied daily.
On top of the MTD late payment penalties a standard 2.5% interest rate is applicable to all outstanding amounts.
MTD digital for ITSA software
The making tax digital program is centered around submitting and storing all accounting records electronically.
Because of this it is a crucial to only use MTD for ITSA compatible software so you can comply fully and avoid late filing and late payment penalties.
HMRC does not provide any MTD software for ITSA and leaves the choice of which software to use up to you.
Before making your first MTD for ITSA submission it is recommended that you ensure you are using HMRC compatible software for not just the submission of your quarterly reporting, EOPS and final declaration but your digital accountancy records as well.
What software can be used for MTD for ITSA?
HMRC has a list of software providers that meet MTD for ITSA standards with most of them coming at a cost but some have free versions.
Microsoft excel spreadsheets are commonly used to manage accounting records however they are not usually compatible for MTD purposes without the use of additional software.
Bridging software is available to solve this problem and allows you to continue using excel for your record keeping and be compliant for MTD for ITSA.
