How to Stay Compliant and Avoid MTD ITSA Penalties

With Making Tax Digital for Income Tax Self Assessment (MTD ITSA) fast approaching, many individuals ask:

“What happens if I miss a quarterly update?”
“Can I be fined if I don’t use the right software?”
“How do I make sure I’m compliant?”

The short answer: Yes — there are penalties.
But with the right system in place, it’s easy to stay compliant and avoid fines altogether.

In this guide, Merranti Accounting breaks down the MTD ITSA penalty system, shows how to stay on track, and explains how our support can ensure you avoid expensive mistakes.

The New Penalty Regime: Points-Based System

From April 2026, if you’re required to join MTD ITSA and you miss a deadline, HMRC will use a points-based system to issue penalties.

Here’s how it works:

The penalty threshold is 4 points for MTD ITSA.

That means if you miss 4 quarterly update deadlines, you’ll be fined £200. Every further missed update is another £200 until your points are reset.

Example Scenario

John is a sole trader with £65,000 income. He’s required to join MTD ITSA from April 2026.

What Other Penalties Could Apply?

1. Late Payment Penalties

If you don’t pay your tax on time after the final declaration:

• 15 days late = 2% of unpaid tax
• 30 days late = +2% more
• Continued lateness = daily interest

2. Non-Compliance with Digital Records

If you fail to keep your records digitally (e.g. paper ledger, handwritten notes), HMRC could fine you up to £3,000 per quarter for non-compliance.

3. Wrong Software or Format

Submitting your updates manually or without recognised software (i.e. emailing spreadsheets) is a breach of MTD rules — leading to penalties or invalid returns.

How to Stay Compliant — The Merranti Way

Staying compliant with MTD ITSA comes down to 3 pillars:

1. Correct Software

You must use HMRC-recognised MTD software to:

• Maintain digital records
• Submit quarterly updates via digital links
• File your final declaration

At Merranti, we help you choose between:

• Xero Simple Plan (£7/month)
• Spreadsheets + bridging software
• QuickBooks or FreeAgent

We’ll set it up, test it, and train you on how to use it properly.

2. Digital Record-Keeping

Your records must include:

• Income received
• Expenses (by category)
• Date of transaction
• Digital copies of receipts/invoices

You can’t copy and paste from one system to another. The data must flow digitally.

Merranti sets up tools like:

• Hubdoc – scan and store receipts
• Bank feeds – automatic transaction import
• Custom templates – if using spreadsheets

We also offer a monthly review service to make sure nothing’s missed or duplicated.

3. Timely Submissions

You must submit your quarterly updates by:

Or elect calendar quarters (recommended). Either way, you’ve got one month to submit after the quarter ends.

Merranti will:

• Send deadline reminders
• Collect and review your data
• Submit on your behalf (or show you how to)

Our Compliance Support Package

We offer a full MTD Compliance Package, which includes:

• ✅ Software setup (Xero/Spreadsheet)
• ✅ Quarterly filing and reviews
• ✅ Final declaration support
• ✅ Hubdoc or digital capture tool
• ✅ Live and AI-powered support
• ✅ Annual eligibility check
• ✅ Submission calendar tracking

Tips to Avoid Penalties

1. Start NOW — Waiting until 2026 is risky; software takes time to learn

2. Use recognised tools — We’ll help you choose the right one

3. Log receipts as you go — Don’t wait until year-end

4. Delegate to us — Let Merranti handle the filing

5. Know your deadlines — Use our calendar and automated alerts

Final Thoughts

HMRC’s MTD ITSA penalty system is designed to encourage good habits — but it can catch out even well-meaning taxpayers.

By partnering with Merranti, you get proactive support, professional oversight, and digital tools to keep your business compliant — and your wallet safe from fines.

Don’t risk £200+ penalties or £3,000 non-compliance charges.

Stay Compliant with MTD ITSA Today

Find More About MTD ITSA Here