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HMRC ponders pushing MTD penalties through third-party software


Commercial tax software providers could be used to display Making Tax Digital penalties and surface HMRC nudges and prompts under proposals laid out to members of the tax authority’s Penalty Reform Representative Body Forum.

10th Aug 2022
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HMRC has told tax body representatives that it is exploring the potential for third-party software to display and manage Making Tax Digital (MTD) penalties. 

The Revenue's VAT Penalty Reform application programming interface (API) would pull information on penalties from HMRC’s systems and push them to third-party commercial tax software, where the information would be displayed within each program’s MTD interface. Software developers will not be mandated to use the new API.

The proposals could also involve the use of automated nudges and prompts based on the Revenue’s guidance framework – known as HMRC Assist – with the stated aim of assisting taxpayers to avoid or minimise penalties.

HMRC confirmed to AccountingWEB that it expects the API functionality to be available in time for the new penalty regime to come into effect from 1 January 2023. AccountingWEB contacted a number of vendors to ask whether they will be able to incorporate the VAT Penalty Reform API into their software by the January go-live date, but none could confirm they will be able to do so.

The scheme will also be extended to MTD ITSA taxpayers when the penalty changes go live to them in April 2024. 

Taxpayers and their authorised agents will still be able to view and manage their penalty position via the Digital Tax Account and Agent Services Account without the need for third-party software. All late submission and late payment penalty notices will still be issued via letter to the taxpayer’s address and to their agent (if applicable), and HMRC stated that penalty notices at this stage will not be issued via the Digital Tax Account or third-party software.

After consultation with vendors during the API development, appeals and disputes will not currently feature in third-party software. Instead, penalties will be able to be appealed both by the taxpayer and their authorised agent via the Digital Tax Account.

Nudges and prompts

Exactly which automated nudges and prompts would be surfaced to taxpayers and agents are currently unclear, but work on this has been ongoing for some time, with HMRC trialling them in its own software and working with commercial providers on the issue. 

HMRC’s digital prompts are real-time messages aimed at helping taxpayers avoid errors and omissions in their returns, while nudges are more general messages about problem areas in tax returns. 

The tax department has been deploying digital prompts using its own software for a number of years, running a variety of trials such as “upfront honesty declarations” in VAT returns, prompts relating to the reporting of coronavirus support scheme grants, and error prompts around relief for residential property financial costs.

According to Richard Wild, head of tax technical at CIOT, the nudges and prompts envisaged in this case are to incentivise prompt filing and payment. "It's likely to be something along the lines that, if the taxpayer doesn’t for example file their next return on time, and because they are near their points threshold, they will receive a penalty of £200," said Wild. "Or, they only have one more on-time filing to make before their points total is reset to zero. So they are nudges to encourage compliance, rather than adopt a particular tax treatment."

MTD points and penalties

MTD penalty reforms come into effect for VAT taxpayers from periods starting on or after 1 January 2023, although the first penalty points for quarterly VAT returns would not be issued until after 7 May 2023 (though points for monthly returns could be issued after 7 March 2023).

According to HMRC, the rules will also apply to taxpayers required to submit digital quarterly updates through MTD for income tax self assessment (ITSA) from the tax year beginning 6 April 2024 (and all other ITSA taxpayers from the tax year beginning 6 April 2025).

The new points-based penalty regime for late submission will initially apply only to those taxpayers who have regular submission obligations (monthly, quarterly or annually). Taxpayers will receive a point every time they miss a submission deadline, and when a taxpayer has reached a pre-ordained threshold determined by their submission frequency, a penalty will be charged for that failure and every subsequent failure to make a submission on time. Points will have a lifetime of two years.

The penalty thresholds will be as follows and once they are reached a penalty of £200 will be levied.

Submission frequency

Penalty threshold


2 points

Quarterly (including MTD for ITSA)

4 points


5 points

You can find out more about VAT penalty reform by watching AccountingWEB's Tax Talk Live webinar with Rebecca Benneyworth and Chris Jennings from HMRC.

Rules will add significant complexity

Tax expert, writer and former accounting firm partner Paul Aplin touched on the points and penalties system – and where software vendors could play a part – last year. He stated that the increased number of filing obligations MTD will, by its very nature, add lead to significant complexity. 

“If taxpayers have difficulty understanding the current penalty system, I think they will find the intricacies of the new system completely baffling. That fails a fundamental test: anyone potentially subject to a penalty should know that it exists, understand the default that will crystallise it and understand how to mitigate it,” he wrote in March 2021.

Fast-forward to the present-day announcement, and Aplin told AccountingWEB that the move presented a chance to use the best in technology to help people avoid penalties.

“The new penalties regime is fairer but far more complex than what it’s replacing,” said Aplin. “Therefore, there’s an opportunity to use software to navigate people through the system.

“If I got a prompt on my smartphone telling me I was x days away from a penalty point unless I file this return, I’d regard that as a good use of tech,” he continued. “But it’s got to be effective. A busy electrician or plumber needs a straightforward message that makes them think ‘I need to do this’.”

CIOT's Richard Wild commented that allowing access to penalty data through third-party software means that the taxpayer will see a ‘richer’ set of information in their software, without having to separately go to their digital tax account to check their penalty position. "On the one hand, this is a good thing as the taxpayer or agent will have everything in one place," said Wild. "But on the other, it creates distance from HMRC’s systems, which you still need to access to pay your tax, appeal a penalty etc."

Kevin Sefton, co-founder of tax app Untied and chartered tax adviser, told AccountingWEB that nudges and prompts have the potential to save taxpayers and their agents time and money and could lead to further developments in the future. However, he went on to flag the potential risk HMRC faces by sending nudges and prompts through software. “Depending on the message, it might not be entirely consistent with what the software is doing and the advice an agent is providing,” he said.

“We need a clear conversation in terms of what this means. While the aim is to build trust, if not put together correctly it’s also a recipe for the breakdown of relationships between HMRC, software vendors, the taxpayer and their agent.”

In terms of the appeals process, Richard Wild flagged the possibility that it may be more difficult for taxpayers to claim reasonable excuse if their software has been prompting them to file on time, and it can be shown that they've seen those prompts.

Deeper issues

Aplin added that there may be deeper issues in terms of moving towards such an approach. “We’re moving into different territory in terms of what we will need to think about,” he said. “Depending on the prompt or nudge, where does responsibility lie for accuracy if you comply with it? When does a nudge become advice? The more reliant we become on software, the more important that question becomes. 

“We need to be aware of the fact that new questions will emerge as we do things differently,” continued Aplin. “Who is responsible for the advice? What constitutes advice? We do need to stop and think about this stuff now because if we don't it could easily become part of the tax landscape by default.”


Replies (33)

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By ireallyshouldknowthisbut
10th Aug 2022 18:09

And the chances of any of this being remotely accurate are.................?

The existing data feeds into the tax return are shockingly bad
Ditto the 'real time' payroll which is anything but.

Sounds like some half baked ideas coming in very late in the day to cope with the fact that the new penalty regime is virtually impossible to understand for the average person, or keep track off. Not least as there may well be different parties carrying out different parts of the job.

The year accountant may not have a clue the client is late with their VAT, or filing their junk MTD quarterly filing data.

The new regime is too complex and if anything encourages people to miss deadlines. You can miss a year of VAT before getting a £200 penalty. Nice!

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By Charlie Carne
10th Aug 2022 18:26

If HMRC can get it to work correctly, then this is a great idea, as it starts to move the agent's interactions with HMRC's client data off their portal and into a better designed portal from the accountant's chosen software provider. The other key data that needs to be pushed externally by API would be tax payments received by HMRC, so that we can see in a single portal what's due and has been paid, which will allow the tax and PM software suppliers to produce reports for accountants that highlight missed payment deadlines and upcoming taxes due across the entire client base.

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Replying to charliecarne:
the sea otter
By memyself-eye
10th Aug 2022 19:48

If HMRC can get it to work correctly....

Dream on.

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Replying to memyself-eye:
By Paul Crowley
10th Aug 2022 20:21

But it confirms that HMRC are serious about penalty farming, which suits the current government because penalties are not tax increases

Thanks (8)
Replying to charliecarne:
By Tornado
10th Aug 2022 20:20

HMRC have lots of good ideas (yes really) but usually fail to get any of them to work.

As mentioned above, even now the quality of API information picked up for Tax Return completion is appallingly bad and incomplete even after years of trying to get it right, and even basic information about the State Pension someone has been paid in a Tax Year is non-existent in the API.

A great idea but still years from being of any practical use.

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Replying to Tornado:
By Hugo Fair
11th Aug 2022 00:10

When will someone senior in HMRC realise one thing ... that it's essential for any automation to result in very near to 100% accuracy (because otherwise it quickly becomes viewed as unreliable and therefore can be safely ignored whenever you feel like it)!

95% (HMRC's favourite measure of 'excellence') just doesn't cut it, if it means accepting that 10s of thousands of incorrect penalties are auto-generated every year/month/week.
Trust is rapidly lost and then almost impossible to regain ... and the experience of the average punter (aka taxpayer) of HMRC's ability to get things right first time (let alone in under a year) are already at rock bottom.

Oh, and the other message that needs to be understood by someone senior in HMRC ... when you find yourself in a deep hole - stop digging!

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Replying to Tornado:
By RickyRoark
11th Aug 2022 09:25

They can have all the good ideas they like - the road to hell is paved with good intentions. In this instance it's a super-highway.

HMRC is nothing more than a parasite furthering its own growth and should be treated as such.

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Replying to charliecarne:
By RickyRoark
11th Aug 2022 09:23

The State (HMRC) weaponizing private enterprise to force its will. You can be as good intentioned as you like - but let's call it for what it is.

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Replying to RickyRoark:
By moneymanager
11th Aug 2022 10:07

It has been recognised for a long time the degree to which we first work for the state, in many spheres it is now very apparent that the aim of the state is to essentially "have" everything with the occasional benevolence of "allowing" us to have something, the oppressive aims on the private residential sector effectively amount to the state control of private assets with no compensation; let's call it for what it is, communism.

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By accountantccole
11th Aug 2022 07:49

Please make it go away

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Replying to accountantccole:
By Jimess
12th Aug 2022 12:58

I second that plea!

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By JustAnotherUser
11th Aug 2022 08:15

When talking about HMRC
- under proposals laid out to members of the tax authority’s Penalty Reform Representative Body Forum (where are these proposals, link?)
- HMRC has told tax body representatives (no link/source/date?)
- HMRC confirmed to AccountingWEB ….. who confirmed this? Quotes? Link?
- After consultation with vendors during the API development, appeals and disputes will not currently feature in third-party software. (According to…hearsay, source, quote?)
- and HMRC stated (who stated this, source, link?) that penalty notices at this stage will not be issued via the Digital Tax Account or third-party software.
-According to Richard Wild, head of tax technical at CIOT…
-Tax expert, writer and former accounting firm partner Paul Aplin …
-Kevin Sefton, co-founder of tax app Untied…

we only get names, roles and quotes for these?

According to HMRC, the rules …. Yay a source finally… published Jan 2022.
And a name…. Chris Jennings from HMRC on an AWeb webinar

Please improve the editorial here, this is the same on every MTD article, it gets cheap views and comments.

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Replying to JustAnotherUser:
Tom Herbert
By Tom Herbert
11th Aug 2022 09:48

Morning JAU,

Some fair points, which I'll try to answer below:

1&2) The proposals and details about the discussions between HMRC and the representative body first landed in my inbox as part of a wider CIOT mailshot, which (as far as I'm aware) isn't online. I don't know your background and relationship with CIOT but for me that's a reputable source.

3&4) I approached HMRC about the issue with a list of questions. A representative from their press team approached various members of their MTD team and provided me with answers, which I then incorporated into the piece. On a wider point, due to personal abuse dished out to some of their colleagues here, via email and on social media, some of the team aren't keen on giving out their names...

We're at an early stage in this, and I believe vendor guidance is being drafted, but myself and our tax editor Rebecca Cave both felt it was important to write about now. As Paul Aplin alluded to in his quote, unless the implications to this are fully thought through then we could find ourselves in (even) more bother further down the track.

I guess it's ultimately about trust. If you don't trust me to piece together an article from what I consider reputable sources that's fine - after all, accountants are professional sceptics. However, as far as I'm aware there's nothing inaccurate in the piece and all aspects have been officially confirmed to me by HMRC.

Thanks for your time and best wishes,


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Replying to TomHerbert:
By RickyRoark
11th Aug 2022 13:49

You are correct Tom, it is about trust.

Lack of trust is not being placed in your ability to piece together an article, it is your "reputable sources" that most people would take issue with.

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Replying to TomHerbert:
By JustAnotherUser
11th Aug 2022 13:51

Thank you Tom, I really do appreciate a response, I trust you....

Its not just this one trusts this vague entity called HMRC that the real policy makers hide behind.... (source: any article on here about MTDfB ;) )

In general I would like to see less articles talking about 'HMRC' which ultimately means nothing, and more references to the policy makers linked to the topic being discussed...

"some of the team aren't keen on giving out their names..."

... now this is a real story, and speaks volumes, would love to hear more about it. I'm confident the people impacted will be the employees and not the department heads, product managers and or policy makers, this is wrong of course and anyone dealing in such behaviour should be exposed and dealt with.

But, no 'company' would act like this, someone somewhere has accountability and its not 'Mr HMRC'. No one acts like this and no other company would get away with it. And as long as we continue to blame 'HMRC' there will be no change.

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Replying to TomHerbert:
By Winnie Wiggleroom
13th Aug 2022 15:38

due to personal abuse dished out to some of their colleagues here, via email and on social media, some of the team aren't keen on giving out their names...

Now this is finally something interesting, more details please. I mean there is no place for abuse of any kind, but there is place for well placed criticism and abuse is a strong word, the details of what abuse we are talking about would be interesting.

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By Rgab1947
11th Aug 2022 09:23

Your kidding right?

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By steve 12321
11th Aug 2022 09:26

OMG. What is wrong with these people? Maybe Bruce Willis can save us? It's pretty desperate. The train crash can be averted!

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Replying to steve 12321:
By Peter-S
11th Aug 2022 11:44

Sadly Mr Willis has retired!

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By Ammie
11th Aug 2022 09:58

Perhaps HMRC should redirect resources to MTD itself and to the education and adaptation it will require to succeed, and less to fine tuning the penalty regime, which clearly is a significant part of the regime and is big part of their focus.

HMRC keep telling us that imposing penalties is not their aim and they do not like to impose such, really?

Perhaps, in support of their tongue in cheek comment that they do not like imposing fines, they pay closer attention to those taxpayers that have failed, investigating reasons and helping them to improve their compliance management and to avoid penalties and to consign penalties to wilful, careless taxpayers who have no real desire to follow the rules.

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By kevinringer
11th Aug 2022 10:10

HMRC are making themselves obsolete. Just think this through: if everyone did use third party software to calculate their tax and either they paid voluntary or had the tax collected by debt collectors, just what is left for HMRC to do?

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By indomitable
11th Aug 2022 10:54

Unbelievable, and I thought HMRC were understaffed.

What brainbox is sitting there at HMRC thinking what other new idea can I stick out there, spend lots of taxpayers money, add something new to the pile of a long list of things that don't work at HMRC and then move on to the next bright idea.

When will someone in government reign these people in!

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By adjadj
11th Aug 2022 11:37

An excellent idea in principle but needs a lot of detailed work to ensure if does not create more work than it saves. In Agile terms it is not needed for the Minimum Viable Solution so should be parked for the moment. An implementation date of 2023 is far too early.

HMRC should focus it efforts and the effort of others on fundamental concerns about the Minimum Viable ITSA Solution such as how corrections to quarterly reporting will work in practice and how will data be used/shared for the reporting of joint property income.

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By kevinringer
11th Aug 2022 11:42

"The proposals could also involve the use of automated nudges ... with the stated aim of assisting taxpayers to avoid or minimise penalties."

I attended a HMRC MTD meeting in 2016 during which HMRC announced that prompts and nudges would be central to MTD. These are necessary if HMRC expect Joe the Plumber, with no accountancy experience, to be turned into an instant bookkeeper by just using software. We all know that leading accountancy software has no intelligence and will permit users to reclaim VAT on wages, business rates, drawings, even the VAT payment to HMRC. As the software industry have been permitted to continue to sell software that is not fit for purpose (ie not fit to be used by millions of self-employed with no bookkeeping experience), prompts and nudges are essential to at least get some degree of accuracy in what Joe the Plumber is inputting into his software. But after 2016, HMRC quietly dropped prompts and nudges. So why is HMRC now announcing them as if they're a great new idea? HMRC has a very short memory. No doubt, this will end up going the way of the 2016 announcement and so many others by HMRC: nowhere.

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Replying to kevinringer:
By rockallj
11th Aug 2022 12:03

Agreed, the AI in online bookkeeping software isn’t good enough for now, let alone anything more complicated.

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Replying to kevinringer:
By adjadj
12th Aug 2022 10:59

I have been involved with software development where a lot of help text was provided to online screens. It was very time intensive and involved multiple subject matter experts who had to consider all the ways how the help text could be misinterpreted. A lot of wording was revised after going life based on user feedback. We had planned for this and after a year the we had a good product.

I am concerned that the wording will be left to software houses to develop; each software house using their own wording; they are not tax experts and have little experience of handling incorrect tax submissions. They will not have to pick up the pieces if the wording is wrong - this will be a mix o HMRC and the taxpayer.

If HMRC want to use nudges they must take ownership of the content and staff it accordingly.

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By kevinringer
11th Aug 2022 11:52

“upfront honesty declarations”

These are not nudges. It's like software T&Cs: who reads them? Everyone clicks "agree". It's the same with honesty declarations. We all tick them without thinking because we see them all the time. If someone is knowingly being dishonest, a tick box is not going to stop them. In most cases I expect errors will be down to lack of knowledge by Joe the Plumber. If his software is Sage and it defaults to standard rated VAT on his drawings, he might think this is correct because the software made the selection, not Joe. So when he sees the honesty box, he has been honest, he's not a bookkeeper so he doesn't know the software made the wrong default choice.

No, nudges are when the software by default should know the business cannot reclaim VAT on drawings so it should default to Sage T9 and if the user changed it to T1 it is as that point a prompt appears explaining to the user why T1 would not be appropriate.

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By adam.arca
11th Aug 2022 13:46

I can't believe there are replies saying this is a good idea (granted that they don't think it will happen).

World peace, a super food eliminating world famine and FTL travel to the stars are all "good ideas" but totally unrealistic anytime soon (not that we shouldn't be working towards those goals). They're still much more likely to happen than HMRC's latest wet dream.

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By jamiea4f
11th Aug 2022 16:19

So if I've got this right HMRC are giving us more to do, which we have to fund as apparently they can't afford to provide us with any software (other than payroll) whilst doing virtually naff all themselves. Hmm sounds like a plan...

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By Mr J Andrews
11th Aug 2022 16:39

This ''Pondering'' should add another 3 years to the off.

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By listerramjet
12th Aug 2022 09:27

It used to be considered that businesses were acting as unpaid tax collectors for a number of different taxes. These "fining schemes" do seem unreasonable in that context, even if it does seem to be an increasing and widening trend, particularly amongst larger businesses, in both public and private sectors. With I would suggest local government and Whitehall setting the trends. The definition of "late" does seem unreasonably arbitrary, and of course it is policed by HMRC - summary justice!
Thing about the EU tax called VAT, it is supposed to be simple to administer, but in practice it is anything but. Perhaps we should consider a "fining scheme" be applied to HMRC based on the complexities they introduce. As a starter for 10, how about a "fine" of £1,000 per return for partial exemption? It wouldn't cover the pain, but it might make them think again!

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Replying to listerramjet:
By kevinringer
12th Aug 2022 09:46

Your post raises the question as to whether there is a limit to how complex a tax can be. If a tax is so complex that it can't reasonably be understood by Joe the Plumber, is it reasonable to expect Joe to operate the tax correctly? If it is not reasonable, is it reasonable to expect Joe to have to hire a professional to assist him? If it is too complex, and it is not reasonable to expect Joe to pay for professional help, can the courts enforce penalties for failure to operate?

The changes to income tax a few years ago introducing the Dividend Allowance and Personal Savings Allowance and the interaction with the Personal Allowance are a good example of complexity: even HMRC's own software couldn't optimise the Personal Allowance correctly until Tim Good sorted them out (well, it's not completely sorted out yet and he's still battling with HMRC). So if HMRC can't get it right, how is Joe the Plumber expected to get it right and in turn, can he be fined for getting it wrong? As we all know Joe can be fined for getting it wrong no matter how unreasonably complex it is, why can't we fine HMRC when they get it wrong? I know that's different to fining them for making it complex in the first place but HMRC need to realise that if something is too complex to be reasonably applied, it won't be applied correctly and so won't be adhered too, so why introduce it in the first place?

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Replying to kevinringer:
By spilly
12th Aug 2022 14:06

Maybe if Jim Harra’s pay was linked to the number of complaints received we might see some progress.
No one expects everyone to get everything right first time, but HMRC expects us and our clients to do so. However, there are no repercussions on them when they get something wrong or fail to respond in a timely manner.
Personally, I would love to be able to charge them for just the time wasted on phone calls, let alone sorting out their errors.

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