HMRC's Points-Based Penalty Regime: What Late VAT and MTD Returns Cost

A single late VAT return used to trigger an automatic surcharge based on turnover, often out of all proportion to how late it actually was. HMRC replaced that system with a points-based model, first for VAT and now, as each cohort joins, for Making Tax Digital for Income Tax too. It is fairer in principle. It is also easy to misjudge, because the real cost of getting it wrong sits in a second, separate penalty that has nothing to do with points at all.

Why HMRC moved to a points system

The old VAT default surcharge charged a percentage of the VAT due for every late return within a rolling surcharge period, with the percentage stepping up each time. A business that was a day late on a huge quarter could face a bill wildly out of line with the lateness. The points-based regime, introduced under Finance Act 2021 for VAT periods starting on or after 1 January 2023, separates the penalty for filing late from the penalty for paying late, and only bites hard once a pattern of lateness has actually built up.

How the points work

Every time you miss a filing deadline, you get one point. Nothing is charged for the first few. What matters is the threshold, and the threshold depends on how often you are required to submit:

• Annual filers: threshold of 2 points
• Quarterly filers: threshold of 4 points (this is where standard VAT returns sit, and where MTD Income Tax quarterly updates sit)
• Monthly filers: threshold of 5 points

Once you reach the threshold, HMRC charges a fixed £200 penalty. Miss another deadline while you are still at the threshold and another £200 penalty follows, every time, for as long as you stay there.

How points come off again

Points are not permanent. Each point expires 24 months after the month in which it was awarded, provided two conditions are both met: you are below the penalty threshold, and you have actually submitted everything that was due over the preceding 24 months. Miss something recent and the clock effectively resets for that submission, so a habit of catching up late never quite clears the slate.

For a quarterly VAT filer or a landlord doing quarterly MTD updates, this means four separate late submissions inside a rolling window is genuinely the point where the fixed penalties start, not an abstract worst case. It is closer than it sounds once a bookkeeping system falls behind.

The part people miss: late payment is a different penalty entirely

Points and the £200 fixed penalty only ever relate to filing late. Paying the tax late is penalised separately, and this is usually where the real money is:

• No penalty if you pay, or agree a Time to Pay arrangement, within 15 days of the due date
• A first penalty of 3% of the tax still outstanding if it remains unpaid at day 15
• A further 3% penalty on whatever is still outstanding at day 30
• From day 31, a second penalty accrues daily at an annual rate on the remaining balance, a rate HMRC increased significantly for VAT and MTD Income Tax from April 2025 as part of wider compliance funding measures

All of this is on top of ordinary late payment interest, which runs from the original due date regardless of any penalty. A director who assumes "I filed on time, I'm fine" while quietly leaving the VAT unpaid for six weeks can end up with a materially larger bill than someone who filed a single return two days late and picked up one solitary point.

Where this lands for property companies and landlords

Most property SPVs are quarterly VAT filers, so the 4-point threshold is the relevant one. Landlords brought into MTD for Income Tax face the same quarterly rhythm: four updates a year plus a final declaration, each one a submission capable of earning a point. The first wave, with qualifying gross income over £50,000, started from April 2026; the threshold drops to £30,000 from April 2027, pulling in a wider band of landlords who have never had to think about quarterly deadlines before.

A development company juggling live sites and a landlord juggling a portfolio's worth of software both tend to fall behind for the same reason: nobody owns the deadline. Points accumulate quietly in the background until a fixed penalty arrives that feels disproportionate to a single missed month, when in fact it reflects several.

Common mistakes

• Treating a missed deadline as a one-off with no consequence, because the first few points carry no charge
• Not tracking points at all, so the fourth or fifth late submission comes as a genuine surprise
• Filing on time but assuming that also covers payment, when the two are penalised on entirely separate clocks
• Leaving a genuine cash flow problem unaddressed instead of agreeing Time to Pay before day 15, which stops the late payment penalty clock without needing the tax to actually be paid yet
• Assuming a reasonable excuse claim will automatically wipe a point, when HMRC still expects the appeal to be made properly and evidenced

What actually protects you

The single most effective fix is unglamorous: a fixed date each period when VAT or the MTD quarterly update is filed, sitting with someone whose job it is to own that date, not a general intention to "get to it." For a portfolio moving onto MTD for the first time, building that discipline before the mandatory start date is far easier than building it under pressure once penalties are already accruing.

Common questions

What is the points-based penalty regime for VAT and Making Tax Digital?

It is HMRC's system for penalising late submissions, introduced for VAT periods from January 2023 and extended to each taxpayer as they join Making Tax Digital for Income Tax. Instead of an automatic fine for every late return, you get one point per missed deadline. Only once you reach a points threshold does a fixed penalty apply.

How many points before I get a penalty?

It depends on how often you file. The threshold is 2 points for annual filers, 4 points for quarterly filers (VAT returns and MTD Income Tax quarterly updates both fall here) and 5 points for monthly filers. Once you reach the threshold, HMRC charges a fixed £200 penalty, and every further late submission while you remain at the threshold triggers another £200.

Do points-based penalties apply to landlords doing MTD for Income Tax?

Yes, from the date each landlord's MTD Income Tax obligations start. Landlords with qualifying gross income over £50,000 were brought in from April 2026, with the threshold dropping to £30,000 from April 2027. Each quarterly update, and the year-end final declaration, is a submission that can earn a point if it is late. Landlords not yet within MTD stay on the older penalty rules until their start date arrives.

Is the late payment penalty separate from the points-based late submission penalty?

Yes, and this is where most of the real cost sits. Points and the £200 fixed penalty only relate to filing late. Paying late is penalised under a completely separate regime: a percentage charge at day 15 and again at day 30 if the tax is still outstanding, then a daily charge from day 31 until payment, on top of ordinary late payment interest.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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