Making Tax Digital – Read this and weep…

First published on 18 July 2023 by Alastair
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  • Making Tax Digital
  • HMRC
  • General News

It is an almost inexorable law of government that any major project in the public eye runs way beyond budget (did someone mention Edinburgh’s Trams, to say nothing of HS2 …).  Unsurprisingly, this also applies to the less public, but nonetheless flagship scheme that is Making Tax Digital (MTD). This is now reported as likely to cost HMRC (in other words, us!) FIVE TIMES the original forecast.  This figure, it should be emphasised, is not a claim made on the front page of the Daily Mail, but comes from the rather more prosaic body that is the National Audit Office (NAO).

One of our clients was involved in a pilot (involving online accounting) for MTD.  It was, he said, an interesting and worthwhile exercise.  It was also so long ago that he is now just about to retire, which means - lucky him - that he’ll miss out on the MTD roll-out.

The bare figures are shocking enough: from an initial estimate of £226M, the likely cost of MTD will now be around £1.3BN. To date, some £642M has been spent, so there is clearly a lot more work to be done.  However, for us – and you - a major concern is the additional comments made by the NAO about the entire scheme. For example…

HMRC had, according to the NAO, set ‘unrealistic’ ambitions and timescales, with “unknown levels of risk.”   Moreover, HMRC underestimated the complexity of moving from its existing systems to MTD and specifically had not fully understood the scale of the challenge of moving data and systems when it prepared its initial business case.

Then there are the costs to taxpayers for complying with MTD.  In its May 2022 business case, HMRC forecasted total net ongoing costs to taxpayers of around £900m over five years…however, the NAO has found that HMRC excluded significant upfront costs of £1.5bn to VAT and self-assessment taxpayers from the business case’s cost-benefit analysis. These costs related to taxpayers updating their own systems and obtaining tax advice. Bearing in mind that MTD is supposed to make tax-raising more efficient and increase government revenue, this omission is quite important, because if these up-front costs had been included, they would have shown that the combined cost to the government and to taxpayers of proceeding with MTD for self-assessment would have exceeded the forecast additional tax revenue. 

Now, in fairness, HMRC claimed these omissions would not have resulted in different decisions being taken.  To put some meat on the bones of this particular argument, in 2016 HMRC said MTD would generate an annual return of £600m in additional tax revenue from VAT and self-assessment by 2020-21. It now expects to reach this level in 2027-28. Given what we’ve seen so far, how confident are you that this goal will be achieved? Given everything else surrounding MTD, it is not unfair to ask what on earth makes them think that they’ll get it right this time.

It gets worse…  The NAO report also says that HMRC’s original 2016 plan to introduce MTD by 2020 (this, in case you can’t remember, was for VAT, self-assessment and corporation tax) was unrealistic because the tax authority failed to assess the scale of work required from the outset.

The reality is that MTD for self-assessment is now at least eight years behind the original timetable. This is as a result of the delays in delivering MTD for VAT. These reduced HMRC’s capacity to build its self-assessment system and support the development of commercial software.  And, to be fair again, there is always the get-out-of-jail excuse of “Brexit and the pandemic.”  These doubtless had an effect, but not one that is unique to HMRC… 

I could go on … so I will…

The NAO found that HMRC had carried out very little testing as to how MTD would work for self-assessment. HMRC forecast more than 15,500 business taxpayers would join the pilot. Around a thousand taxpayers wanted to sign up but most were ineligible (due to overly onerous restrictions on anyone wanting to be involved), leaving only 15 participants when the pilot was closed to new entrants. Surprise surprise!  - the pilot has now been put on hold and is being reviewed by HMRC.

Among the NAO’s recommendations are that HMRC should prepare a separate business case for MTD for self-assessment so that decision-makers can understand the costs, benefits, and delivery risks for the full range of options. This should include greater clarity on how different groups of business taxpayers are affected. HMRC also needs to prioritise resolving the outstanding technical issues, including how taxpayers with different year-ends or jointly-let property, or those represented by multiple agents, will be able to report under the system. Most importantly, the NAO says HMRC must run an effective pilot to demonstrate how the arrangements would work in practice for taxpayers, their agents and HMRC. 

Gareth Davies, head of the NAO, acknowledges that MTD has the potential to improve the system’s efficiency and effectiveness, but he also notes HMRC has made some recent progress on VAT but has not yet tackled the most complex elements of the programme and “significant delivery risks remain.”

Meg Hillier MP, chair of the Public Accounts Committee, said: “Making Tax Digital by 2020 was never viable. HMRC wanted to increase tax revenue, but completely underestimated the cost and scale of work required to move from its legacy systems and by business taxpayers to move to digital records.

‘Eight years on, many tax professionals remain unconvinced by the proposed approach, which imposes significant costs and burdens on many self-assessment business taxpayers. HMRC has omitted much of these costs to business taxpayers when seeking additional funding. It now needs to demonstrate its plans add up.”

All we are saying is that in a race to finish first between HS2 and MTD, our money is on neither…


Ashley Marshall, M&S Accountancy and Taxation Ltd

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