HMRC Penalties and Appeals Under MTD: What Triggers Fines and How to Dispute Them

Introduction

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) is rolling out between 2026 and 2028. From April 2026 taxpayers with income above £50,000 begin quarterly digital updates and end-of-period statements. With greater automation and regular reporting comes a new focus from HMRC on timely submissions and accurate records. This article explains what triggers HMRC penalties under MTD, how those penalties work, and practical steps you can take to prevent or challenge fines. It is written for self-employed people and landlords who want clear, practical guidance.

MTD ITSA rollout — the quick timeline

• April 2026: taxpayers with income over £50,000 enter MTD ITSA
• April 2027: threshold reduces to income over £30,000
• April 2028: threshold reduces to income over £20,000

These changes mean more sole traders, freelancers and landlords will use digital records and MTD‑compatible software. That in turn changes how HMRC monitors compliance and applies penalties.

Which penalties apply under MTD ITSA?

HMRC may apply penalties for a small number of behaviours linked to digital reporting:

• late or missing quarterly updates and end‑of‑period declarations;
• late payment of tax due, including penalties and interest on unpaid tax;
• failure to keep proper digital records as required by MTD;
• submitting inaccurate information, depending on the level of care and disclosure;
• persistent non‑compliance where earlier notices or requirements are ignored.

How HMRC determines penalties — the principles

HMRC uses three broad principles when deciding penalties:

• the nature of the breach — for example, late filing versus inaccuracy;
• the taxpayer’s behaviour — whether an error was careless, deliberate, or deliberate with concealment;
• whether the taxpayer has a reasonable excuse for the failure.

MTD ITSA retains standard tax law on penalties for inaccuracies. For timing and filing failures HMRC has signalled a tailored approach for digital quarterly reporting. Expect penalties that reflect the severity and frequency of the breach rather than a one‑size‑fits‑all fine.

Late filing and late payment — what to expect

There are two distinct areas to watch: filing deadlines and payment deadlines.

• Filing — under MTD you will submit quarterly updates and a year‑end final declaration. Missing a quarterly update can attract a penalty once HMRC’s enforcement policy for MTD is fully in place. Repeated or persistent failures are more likely to trigger formal penalties.
• Payment — tax paid late remains subject to interest and late payment penalties under existing rules. Interest is charged from the due date until payment. Penalties for late payment can arise immediately or after set grace periods, depending on HMRC’s current policy.

In practice, that means you could face both an interest charge for unpaid tax and a separate penalty for failing to provide timely digital updates that help HMRC trace liabilities.

Inaccuracy penalties — carelessness versus deliberate behaviour

When your digital submission contains errors HMRC assesses the taxpayer’s behaviour. Typical categories are:

• innocent mistake with reasonable care taken — often no penalty;
• careless behaviour — penalties are likely but at a lower rate;
• deliberate behaviour — higher penalties apply;
• deliberate behaviour with concealment — the highest penalties.

These categories remain central. If you can show you kept proper digital records, reconciled your accounts, and followed a reasonable process before submitting, HMRC is less likely to treat an error as deliberate.

Failure to keep digital records

MTD requires records to be kept digitally in compatible software. Failure to do so may result in penalties where the breach is serious. Examples include:

• destroying digital records;
• systematically keeping records offline when digital keeping is required;
• refusing to use MTD‑compatible software when obligated to do so.

Where there is a genuine technical issue, HMRC expects taxpayers to act promptly to correct it and to keep evidence of attempts to resolve the issue.

Common triggers that lead to penalties under MTD

In our work with clients we see recurring patterns that trigger HMRC action. Be mindful of these:

• missing the first quarterly update: many taxpayers underestimate the need for an early entry into the digital cycle;
• poor bookkeeping and unreconciled bank accounts leading to inaccurate quarterly figures;
• using spreadsheets that do not meet MTD requirements or failing to bridge them correctly to software;
• delays in responding to HMRC queries about discrepancies in quarterly updates;
• not declaring rental income promptly for landlords, or mixing personal and business transactions.

How to avoid penalties — practical steps

Prevention is far easier than appeal. Follow these practical steps to reduce risk:

• use MTD‑compatible accounting software with bank feeds and reconciliation tools;
• keep digital copies of invoices, receipts and bank statements; digitise paper receipts promptly;
• reconcile your bank account each month, not just at year‑end;
• run a quarterly review before each submission to check major receipts and expenses;
• for landlords, separate rental accounts and clearly tag allowable expenses such as repairs, insurance and agent fees;
• set reminders for submission and payment dates and consider a direct debit for tax payments where possible;
• maintain an audit trail in your software to show when adjustments were made and why;
• keep a record of any technical issues with software or HMRC services and any helpdesk reference numbers.

What to do if you receive a penalty notice

If HMRC issues a penalty notice, act promptly. Steps to take:

• read the notice carefully and check which period and submission it relates to;
• verify the facts in your accounting software and try to identify the cause;
• gather supporting documents: bank statements, invoices, reconciliation reports and email records;
• if the penalty is for late payment, check whether interest also applies and arrange payment if due;
• contact HMRC promptly if you believe the penalty is incorrect; early engagement often resolves matters without formal appeal.

Challenging a penalty — the appeals process

There are clear stages to dispute a penalty. Follow this order to maximise your chance of success:

• informal review — phone or write to HMRC, politely request a review and supply evidence. Keep records of your contact.
• formal review — if the informal route fails, request a formal review in writing. Explain the reasons, include evidence, and point to any procedural errors by HMRC.
• statutory appeal — after a formal review you can appeal to the tax tribunal. Time limits apply, typically 30 days from the review decision letter, so act quickly.

When appealing, common grounds include incorrect facts, HMRC error, reasonable excuse, or procedural unfairness. Reasonable excuses can include serious illness, bereavement, or unexpected system failures beyond your control — but they must be supported by evidence.

Writing a strong appeal or reasonable excuse letter

Your letter should be clear, factual and include the following:

• your details and taxpayer reference;
• what you are contesting and the penalty reference;
• a concise chronology of events;
• evidence to support your case: screenshots, support tickets, medical notes or correspondence;
• an explanation of steps taken to correct the error and prevent recurrence;
• a polite request for the penalty to be reviewed or cancelled.

Keep copies of everything you send and send by recorded delivery if posting.

Practical examples

Example 1 — missed quarterly update: a freelance designer misses a single quarterly update because their bookkeeping was delayed. They received a warning, then submitted late but promptly. HMRC may decide a formal penalty is unnecessary, especially if the taxpayer shows steps taken to prevent recurrence.

Example 2 — inaccurate rental income: a landlord fails to include income from a short‑term letting. If the omission appears careless and the landlord amends the records voluntarily, a lower penalty or none at all may be applied. If the omission appears deliberate, a higher penalty will follow.

Record keeping and evidence — what HMRC looks for

When assessing appeals HMRC looks for a consistent, demonstrable record keeping process. Helpful evidence includes:

• digital ledgers showing real‑time entries and reconciliations;
• bank statements matching declared receipts;
• copies of invoices and receipts with dates and supplier details;
• support tickets or logs showing software outages or HMRC service issues;
• correspondence with your accountant or software provider about the problem.

When you might not win an appeal

Appeals are less likely to succeed if:

• there is a pattern of repeated non‑compliance;
• you cannot provide contemporaneous records;
• the explanation is vague or uncorroborated;
• there was no attempt to remedy the situation promptly after discovery.

Working with an accountant or agent

Using an agent authorised with HMRC can help in two ways: preventing penalties through better bookkeeping and representing you during disputes. If you appoint us or another agent, ensure the authorisation is in place — HMRC must recognise who can act on your behalf.

Technology and MTD — what to check in your software

Choose MTD‑compatible software that:

• supports digital record keeping and bridging where necessary;
• connects to bank feeds to reduce manual error;
• keeps an immutable audit trail of submissions and adjustments;
• allows you to export evidence quickly for an appeal.

Keep software updated and keep a backup plan if your software provider has outages.

Key takeaways

• MTD ITSA is phased from April 2026 to April 2028 — be ready for the date that applies to you.
• Penalties relate to late filings, late payments, inaccuracies and failure to keep digital records.
• HMRC assesses behaviour and reasonable excuse — good records and prompt action matter.
• Prevent problems with reliable software, regular reconciliations and clear processes.
• If you receive a penalty notice act quickly: informal review, formal review, then tribunal if necessary.

Need help?

At Tax Digital we specialise in Making Tax Digital and supporting self‑employed people and landlords through the ITSA rollout. If you want a friendly review of your bookkeeping, help with MTD‑compatible software, or support appealing a penalty, get in touch. We take the stress away and help you meet your obligations confidently.