VAT penalty points beside MTD for Income Tax penalty points

acrenvo.com/guides/mtd-vat-and-income-tax-penalties, last reviewed 31 October 2026

Helen is fictional, but the worry she has is a common one. She runs a small café as a sole trader, registered for VAT, and she also lets out a house she inherited. She sends VAT Returns already, and now she is using Making Tax Digital (MTD) for Income Tax too. She has heard that both taxes use penalty points, and she wants to know whether a late VAT Return could push her closer to an Income Tax penalty, or the other way round. This guide sets the two systems side by side, using GOV.UK’s own rules for each.

Two separate sets of points

The two systems do not share points, which answers Helen’s question in both directions. GOV.UK says so on its MTD for Income Tax penalties pages: If you are also registered for VAT, your penalty points for Making Tax Digital for Income Tax are separate from your penalty points for VAT.

That means each tax keeps its own count and its own threshold, and a point on one side never moves you closer to a penalty on the other. The rules for building up and clearing points are similar in shape, though, so the sections below take each tax in turn and then compare them.

Late VAT Returns

For VAT accounting periods starting on or after 1 January 2023, late submission penalties apply if you submit your VAT Return late. This includes nil or repayment returns. For each return you submit late, you’ll receive a penalty point until you reach the penalty point threshold.

How many points you can collect depends on how often you send returns. The penalty point threshold is set by your accounting period. The threshold is the maximum points you can receive.

A few returns sit outside the rules altogether. The late submission penalty rules do not apply to your:

• first VAT return if you’re newly VAT registered
• final VAT return after you cancel your VAT registration
• one-off returns that cover a period other than a month, quarter or year

Late MTD for Income Tax deadlines

On the Income Tax side, GOV.UK’s rule is that you get one point for each missed deadline, and that the threshold for people required to use MTD is four points. Reaching it brings a £200 penalty, and each deadline missed after that brings another. You can only get one penalty point per deadline. This applies even if you have more than one business and send more than one quarterly update late (for tax years after 2026 to 2027).

The regulations that brought these penalties in so far cover people who had to use MTD in the 2026 to 2027 tax year and, under earlier regulations, volunteers who chose to come under them. When we checked legislation.gov.uk on 31 October 2026, the regulations that would do the same for the later intakes had not yet been made.

There is also a concession for the first year. There are no penalties for missing a quarterly update deadline for the 2026 to 2027 tax year. You still need to keep digital records and send quarterly updates before you can submit your tax return. The MTD penalties guide covers the Income Tax rules in full, including what changes for volunteers.

The two systems side by side

Helen sends her VAT Returns quarterly, so her VAT threshold is the quarterly one. The table compares that with the Income Tax rules as GOV.UK describes them.

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Removing VAT penalty points

Below the threshold, VAT points clear themselves. If you’ve not reached the threshold for penalty points for your accounting period, individual points will expire automatically. When penalty points expire depends on the date your return was due. If the deadline for your return was:

• not the last day of a month — a penalty point expires on the last day of the month, 24 months after this
• the last day of a month — a penalty point expires on the last day of the month, 25 months after this

At the threshold it takes deliberate work. If you’ve reached the penalty points threshold and have the maximum points allowed for your accounting period, you can only remove them by meeting both conditions A and B. GOV.UK’s two conditions are to:

1. complete a period of compliance, submitting all returns by the deadline
2. submit all outstanding returns for the previous 24 months

The period of compliance depends on how often you send returns.

Paying VAT late

Late payment is handled separately from late returns, and it does not use points. For VAT accounting periods starting on or after 1 January 2023, late payment penalties apply to late VAT payments. For late payment penalties, the sooner you pay the lower the penalty amount will be. Late payment penalties can apply to any payments of VAT not paid in full by the relevant due date except:

• VAT payments on account
• instalments for the VAT Annual Accounting Scheme

You’ll get a first late payment penalty if your payment is 16 or more days overdue. The first late payment penalty is calculated at 3% on the VAT you owe at day 15. When your payment is 31 or more days overdue, your first late payment penalty increases, and you get a second late payment penalty. The first late payment penalty is calculated at 3% of what was outstanding at day 15 plus 3% of what is still outstanding at day 30. The second late payment penalty is calculated at a daily rate of 10% per year on the outstanding balance.

From the first day your payment is overdue, until you pay in full, we’ll charge late payment interest. If you cannot pay on time, it is worth talking to HMRC early. If HMRC agree a Time to Pay arrangement with you, it can mean lower, or no, late payment penalties. It can cover all outstanding amounts due, including penalties and interest.

The guide to late payment interest on VAT explains how that interest is worked out, with GOV.UK’s example.

Paper returns and appeals

One VAT penalty has nothing to do with lateness. HM Revenue and Customs can charge you a penalty of up to £400 if you send a paper VAT Return and you’re not exempt. If you think a penalty is wrong, your penalty may be cancelled or amended if you have a reasonable excuse.

For how the two sets of rules fit together more generally, the guide to MTD for VAT and MTD for Income Tax is the place to start.

Questions about VAT and Income Tax penalty points

You may also find this page useful: Penalty estimator.