The Fear That’s Paralyzing Business Owners
“If I miss one quarterly deadline, I’ll get hit with a £200 fine immediately.”
This fear is keeping thousands of sole traders and landlords awake at night. Many believe that MTD operates like a strict traffic camera – one mistake and you’re instantly penalized. The thought of facing a £200 fine for a single late submission is terrifying for small business owners already juggling multiple responsibilities.
The reality is much more forgiving than this fear suggests.
✅ REALITY: You Need Four Late Submissions for a £200 Penalty
The new penalties are less severe and fairer than the previous ways HMRC penalised businesses. Their goal is better behaviour, rather than simply penalising mistakes. The new points-based penalty regime is designed to be proportionate, penalising only the small minority who persistently miss their submission obligations rather than those who make occasional mistakes.
How the Points System Actually Works
Similar to speeding fines for motor vehicles, the new late submission system is based on a points system:
Point Accumulation:
- 1 point = 1 late quarterly submission
- 2 points = 2 late quarterly submissions (no fine)
- 3 points = 3 late quarterly submissions (no fine)
- 4 points = 4 late quarterly submissions £200 penalty triggered
Different Thresholds by Frequency:
- Monthly submissions: 5 points needed for penalty
- Quarterly submissions: 4 points needed for penalty (This applies to MTD Income Tax)
- Annual submissions: 2 points needed for penalty
The Forgiving Nature of the System
Points Expire After 24 Months
Accrued points expire after 24 months where the taxpayer remains below the points threshold. This means if you occasionally miss a deadline but generally comply well, your points will disappear over time.
Testing Phase Protection
During the MTD Income Tax testing phase, you will not accumulate penalty points for late quarterly MTD submissions. This provides some leeway as you adjust to the new system, but you should still strive to meet all deadlines to establish good habits for when the full penalty regime takes effect.
Reasonable Excuse Protection
If you have a valid reason for missing a deadline, you can appeal both points and penalties. Valid reasons include:
- Serious illness or bereavement
- Technical failures with software or HMRC systems
- Natural disasters or exceptional circumstances
- Other situations beyond your control
Real-World Example: How Points Build Up
Year 1:
- Q1: Submit on time (0 points)
- Q2: Miss deadline due to illness (1 point)
- Q3: Submit on time (still 1 point)
- Q4: Submit on time (still 1 point)
Year 2:
- Q1: Submit on time (still 1 point)
- Q2: Miss deadline due to software issue (2 points)
- Q3: Submit on time (still 2 points)
- Q4: Miss deadline due to holiday confusion (3 points)
Year 3:
- Q1: Miss deadline due to workload (4 points = £200 penalty)
Even in this scenario, you’d have missed 4 out of 12 quarterly deadlines before facing any financial penalty.
The Business Benefits of This System
Encourages Good Habits Without Harsh Punishment
The system recognizes that life happens. Occasional late submissions won’t bankrupt you, but persistent non-compliance will face consequences. This encourages better business practices without being punitive.
Better Cash Flow Management
Knowing the penalty structure helps you plan better:
- Set up calendar reminders for quarterly deadlines
- Budget for potential penalties if you’re consistently late
- Use the points system as a warning system to improve
Improved Record-Keeping Incentive
The points system encourages regular engagement with your financial records, leading to:
- Better understanding of your business performance
- More accurate tax estimates throughout the year
- Earlier identification of financial issues
- Improved business decision-making
Protection Features Built Into the System
Multiple Warnings Before Penalties
You’ll receive:
- 1st late submission: 1 point + notification
- 2nd late submission: 2 points + notification
- 3rd late submission: 3 points + notification
- 4th late submission: 4 points + £200 penalty
Points Reset After Good Behavior
After a taxpayer has reached the penalty threshold, all the points accrued within that points total will be reset to zero when the taxpayer has met both the following conditions:
- A period of compliance (meeting all submission obligations on time for 12 months for quarterly filers)
- The taxpayer has submitted all the submissions which were due within the preceding 24 months
Separate Point Systems
Points accrue separately for VAT and Income Tax, so your MTD Income Tax points don’t affect your VAT position and vice versa.
HMRC’s Light Touch Approach
HMRC says that it will apply ‘a light touch’ to penalties for the first 12 months of operation of the new scheme. This means even more leniency as the system beds in.
Practical Steps to Avoid Penalties
Set Up Your Safety Net
- Calendar reminders: Set multiple alerts before each deadline
- Software notifications: Most MTD software includes deadline warnings
- Accountant involvement: Have your agent handle submissions
- Quarterly routine: Establish a consistent submission schedule
Key Quarterly Deadlines to Remember
- Q1 (6 April – 5 July): Submit by 5 August
- Q2 (6 July – 5 October): Submit by 5 November
- Q3 (6 October – 5 January): Submit by 5 February
- Q4 (6 January – 5 April): Submit by 5 May
Use Technology to Your Advantage
- Automated reminders: Set up email and phone alerts
- Software integration: Choose MTD software with built-in deadline management
- Mobile apps: Access your records and submit on the go
- Professional support: Consider using an accountant for peace of mind
The Bigger Picture: A Fairer System
The new system is actually more lenient than the previous regime, which imposed immediate financial penalties for late submissions. The points system recognizes that businesses face challenges and gives multiple opportunities to improve compliance before imposing fines.
What This Means for Your Business:
- Room for mistakes: Occasional late submissions won’t cost you money
- Clear warnings: You’ll know exactly where you stand with points
- Fresh starts: Good behavior resets your points to zero
- Business focus: Less fear means more energy for growing your business
Turn Compliance Into Competitive Advantage
Instead of fearing the penalty system, use it as a framework for better business management:
Regular Financial Reviews
Quarterly submissions force you to review your finances regularly, leading to:
- Better cash flow planning
- Earlier problem identification
- More informed business decisions
- Improved profitability tracking
Professional Development
Learning to meet quarterly deadlines develops:
- Better time management skills
- Improved organizational systems
- Enhanced business discipline
- Greater financial awareness
Relationship Building
Working with MTD-compliant accountants and software providers:
- Builds professional networks
- Provides ongoing support
- Offers business advice beyond compliance
- Creates opportunities for growth
Getting Started with Confidence
Join the Testing Phase
Take advantage of the penalty-free testing period to:
- Practice quarterly submissions
- Get comfortable with the software
- Establish good habits
- Access dedicated HMRC support
Start Simple
- Begin with basic MTD software
- Focus on accuracy over speed
- Build confidence gradually
- Ask for help when needed
The Bottom Line
The MTD penalty system is designed to help, not hurt, your business. With four chances before any financial penalty, expiring points, and appeal rights, it’s much more forgiving than the fear suggests.
Use this knowledge to focus on what really matters: running your business successfully. The penalty system is there to encourage good practices, not to catch you out with surprise fines.
Most importantly, remember that you’re not alone. Thousands of businesses are going through the same transition, and support is available at every step.
Contact AHBS Limited: 0115-932-9888 or book: https://tidycal.com/simonahbs/mtd
