HMRC’s points-based penalty system for MTD ITSA, explained

The points-based late-submission regime in Schedule 26 Finance Act 2021 replaced the old surcharge model for MTD VAT in January 2023 and now applies to MTD ITSA from 6 April 2026. The mechanics are the same in both regimes, but for ITSA the submission obligations are materially heavier — four quarterly updates plus a Final Declaration each year — so the points accumulate faster and reset more slowly. This guide is for firm staff who have to defend penalty notices on behalf of clients.

The older inaccuracy-penalty regime in Schedule 24 Finance Act 2007 is unchanged and runs in parallel. It penalises incorrect figures on a return (careless, deliberate, or deliberate and concealed). Schedule 26 only deals with late submission. Distinguishing the two when reading a penalty notice is the first thing to do.

One point per missed submission

Under Schedule 26 FA 2021, paragraph 4, HMRC awards one penalty point each time a taxpayer fails to make a submission on or before its due date. Points accrue per submission obligation group — quarterly updates and the Final Declaration are treated as one group for ITSA purposes (see CH192000 for the threshold table).

That matters because it means a missed Q1, a missed Q3, and a missed Final Declaration all sit on the same points balance. A client cannot have “a clean record for the Final Declaration” while sitting on three quarterly-update points.

The £200 trigger

The threshold for ITSA quarterly obligations is four points (CH192000). The fourth point that takes the balance to the threshold triggers an automatic £200 fixed penalty. Every further missed submission after that triggers another £200 — without any additional point being awarded, because the balance is already at the threshold. The penalty does not scale with the size of the tax liability; it is a flat £200 each time.

A landlord who misses every single submission in 2026/27 — four quarterly updates plus the Final Declaration — would therefore accumulate four points on the first four misses (with a £200 penalty on the fourth) plus a further £200 on the fifth miss. Total £400 in fixed penalties, plus any late-payment interest under the separate FA 2009 regime.

Points expire — but only on a sliding scale

A point that does not take the balance to the threshold expires automatically 24 months after the start of the month following the month it was awarded (Sch 26 FA 2021, paragraph 21). So a point awarded for a Q1 update missed on 7 August 2026 expires on 1 September 2028, provided the balance stayed below the threshold throughout.

That “provided” matters: if the balance ever hits the threshold, the individual-point expiry rule stops applying. From that moment on, only the reset mechanism (below) will clear the points — calendar drift alone does not.

How to reset a balance that’s hit the threshold

Once a client’s balance is at four points, the only way to get it back to zero is to satisfy two conditions concurrently (CH193000):

• A period of compliance. Every submission due in the relevant submission frequency group is submitted on or before its due date. For ITSA quarterly returns the period of compliance is 24 months.
• All outstanding submissions filed. Every return due in the previous 24 months — whether late or not — has actually been submitted. A still-missing Q2 from two years ago blocks the reset even if every subsequent return was on time.

When both conditions are met, the balance resets to zero automatically. There is no application form. The agent does not need to ask. But until both are met, fresh £200 penalties continue to accrue for every late submission.

Worked example: a year of submissions

Take a higher-rate landlord whose 2024/25 gross property income was £62,000 — so in scope from 6 April 2026. Quarterly updates are due on the standard 7 August / 7 November / 7 February / 7 May deadlines. The Final Declaration is due 31 January 2028.

Suppose the client misses Q1 (filed 14 August 2026 instead of 7 August), files Q2 on time, misses Q3 (filed 20 February 2027), misses Q4 (filed 15 May 2027), and misses the Final Declaration (filed 10 February 2028).

• 7 August 2026 — Q1 missed. Balance: 1 point. No financial penalty.
• 7 November 2026 — Q2 on time. Balance: 1 point. Note the on-time submission does not reduce the balance — only a full 24-month period of compliance does.
• 7 February 2027 — Q3 missed. Balance: 2 points.
• 7 May 2027 — Q4 missed. Balance: 3 points.
• 31 January 2028 — Final Declaration missed. Balance: 4 points. £200 fixed penalty issued.

If the client then misses Q1 of 2028/29 on 7 August 2028, no new point is added (the balance is already at the threshold) but another £200 fixed penalty is issued. The clock on the 24-month period of compliance starts again from the date of that miss, meaning the earliest possible reset is 7 August 2030 — and only if every submission in between is on time and every historic return is filed.

One subtlety: the Q1 point awarded on 7 August 2026 would normally have expired on 1 September 2028. But because the balance hit the threshold on 31 January 2028, individual expiry no longer applies. That point sits on the balance until the full reset.

Appealing on reasonable excuse

Schedule 26 imports the same “reasonable excuse” standard used elsewhere in the tax code (paragraph 20). HMRC’s internal guidance is at CH160000 onward. The bar is a reasonable person exercising reasonable foresight and due diligence, in the position of the taxpayer, would not have been able to meet the obligation.

What HMRC tends to accept

• Serious illness of the taxpayer or a close family member, supported by medical evidence covering the relevant period.
• Bereavement in the period running up to the deadline.
• HMRC system outages that demonstrably prevented submission, with timestamps from the agent’s software.
• Fire, flood, or theft destroying the records needed to file.
• Postal disruption for paper-based exemption cases (rare under MTD, but it does come up).

What HMRC tends to reject

• “I forgot” or “my accountant forgot”. Reliance on a third party is explicitly not a reasonable excuse under paragraph 20(2)(b) of Sch 26 unless the taxpayer took reasonable care to avoid the failure.
• Insufficient funds to pay for MTD software or an accountant. Affordability of the obligation is not a reasonable excuse.
• Not understanding MTD. Ignorance of the rules is not on its own a reasonable excuse, though HMRC has historically been more lenient in the first year of a new regime.
• Pressure of work or being busy with other clients. The Tribunal has rejected this repeatedly.

Appeals run on the standard route: first a request for HMRC internal review (30 days from the penalty notice), then if needed an appeal to the First-tier Tribunal (Tax). Submit evidence with the initial review request — HMRC will not chase for it, and tribunal hearings on £200 penalties rarely happen in practice because the cost-benefit is poor for both sides.

What this means for firm process

The structural risk for a firm with a book of MTD ITSA clients is not the £200 penalty in isolation. It’s the cumulative effect: a client at the threshold who misses every quarterly update for an extra year is £800 worse off, and the firm wears the relationship damage. Three practical implications:

1. Track the points balance at the client level, not just the submission. A client with three points is one missed update from a financial penalty; flag them.
2. Chase early. Most missed quarterlies are information gaps, not refusal — the client doesn’t have a bank statement, hasn’t answered a categorisation question, or hasn’t responded to a missing-receipt request. The chasing cycle is what determines whether they file on time.
3. Document evidence as you go. If a reasonable excuse situation does arise — a client’s illness, an HMRC outage — having dated records of when you first heard, what you did, and what the client was unable to do is what makes the difference at internal review.

For background on the wider regime, see our overview of MTD ITSA for landlords from 6 April 2026.