Compliance
Preparing for HMRC’s New Digital Compliance Tools: MTD Expansion and Late Payment Penalties
The UK is extending Making Tax Digital (MTD) and ramping up penalties for late payments. Businesses and individuals need to prepare now to avoid unexpected charges.
By NomadicTax Research Team • 5-8 min read • November 24, 2025
## What’s Changing with MTD and Late Payment Penalties
From **6 April 2025**, HMRC will introduce sharp increases in penalties for late VAT and income tax Self Assessment (ITSA) liabilities for those under the Making Tax Digital scheme. The new schedule: **3% penalty at 15 days overdue**, another **3% at 30 days**, and a heavy **10% per annum** if tax remains unpaid after 31 days.([gov.uk](https://www.gov.uk/government/publications/spring-statement-2025-document/spring-statement-2025-html?utm_source=openai))
Parallel to this, there will be an **expansion of MTD for ITSA**, which applies to sole traders and landlords with incomes over **£20,000**. This threshold becomes effective **6 April 2028**. Use of commercial software to submit returns will also become mandatory where the rules apply.([gov.uk](https://www.gov.uk/government/publications/supporting-documents-for-spring-statement-2025/spring-statement-2025-policy-costings?utm_source=openai))
## Compliance Risks and Examples
- **Missed deadlines**: A small business that misses a 15-day deadline on VAT could suddenly face a 3% penalty, followed by compounding charges.
- **Software readiness**: Taxes will need to be filed via compliant software – not just the HMRC portal – from April 2028 for many. SMEs should budget for subscription/training costs.
- **Cash flow concerns**: Late payment penalties could strain cashflow fast; even small delays become costly under the new framework.
## Steps to Prepare and Stay Compliant
- **Audit your calendar**: Identify all VAT/ITSA filing deadlines and build internal reminders at 15-, 30-day marks.
- **Choose software early**: Evaluate digital accounting tools that integrate with HMRC’s MTD requirements. Test ahead of schedule to avoid last-minute issues.
- **Train your team or accountant**: Ensure they are clear about the changed penalty structure and how the MTD criteria apply to you.
- **Cash flow buffer**: Maintain an accessible cash reserve for possible penalties or interest. Analyze scenarios in advance.
## What This Means Long-Term
- The reforms are designed to **reduce the tax gap**, recover unpaid liabilities, and push for greater digitization in tax compliance.([gov.uk](https://www.gov.uk/government/publications/summary-of-tax-update-spring-2025-simplification-administration-and-reform/tax-update-spring-2025-simplification-administration-and-reform-summary?utm_source=openai))
- The time window to adapt is relatively short for VAT and ITSA deadlines beginning April 2025, but longer for MTD expansion.
- Proactive behavior now leads to cost savings; reactive compliance later may prove expensive.