Oops! MTD costs 400% more than HMRC estimated

HMRC's Making Tax Digital (MTD) project has overrun in costs by over £1 billion, and its still only half-baked.The National Audit Office (NAO) has issued a report, ‘Value for Money - Progress with Making Tax Digital’ which confirms that its not value for money. The taxpayer will conclude that the project has been poorly designed and mismanaged.

None of this comes as any surprise to anyone following the progress of the digital by default project. HMRC's then Tax Assurance Commissioner Jim Harra (who is now its Chief Executive), had readily admitted on BBC Radio 4 Moneybox in 2017 that the MTD program brings no cost savings to HMRC.

On this webservice we noted back then that MTD was flawed and called then for a radical simplification of the reporting system, see MTD: Let's Simplify.

Our evidence to a parliamentary enquiry on MTD that year to a parliamentary enquiry on MTD noted that HMRC had consistently underestimated taxpayer costs.

The NAO report notes that:

• HMRC’s initial estimate in 2016 of the cost of introducing MTD for VAT, Income Tax and Corporation Tax was £226 million.
• The total forecasted cost for MTD for Income Tax alone is now £1.3 billion, a 400% increase in real terms.
• When HMRC approached the government for more funding in May 2022 and March 2023, their cost-benefit analyses omitted over £1.5 billion in upfront transitional costs due for VAT and for Self Assessment business taxpayers with income over £10,000.
  • This included significant upfront costs such as purchasing computers and getting support from agents to comply with MTD.
  • Including these costs in the forecasts would have shown that combined HMRC and taxpayer costs would exceed the predicted extra tax revenue to be raised by MTD. HMRC told the NAO that they did not believe that including these costs would have changed any of the decisions made by the government.
• MTD for Income Tax has been delayed four times since announced in 2015 and is now eight years behind the original timetable.
• The NAO said HMRC’s original timeline for introducing MTD by 2020 was not realistic, though HMRC did take sensible steps to revise its plans once it understood the scale of the task better. Resources were constrained by the redeployment of staff to deal with Brexit and the COVID-19 pandemic.
• HMRC now expects MTD to generate £3.9 billion of additional tax revenue by 2033-34 which would be a positive return in the end.
• Implementing MTD for Self Assessment by 2026-27 will be challenging, especially as the scale of work is still uncertain and HMRC have not provided any recent progress reports.

In its conclusions, the NAO said that HMRC have not demonstrated that the programme offers the best value for money for digitalising the tax system with repeated delays undermining credibility as well as increasing costs. It recommends that HMRC develops a more robust business case by:

• Testing the current options and design including reassessing the scope for generating more tax revenue and benefits to business taxpayers.
• Reassessing the delivery plan to see if it is realistic and value for money.
• Investigate how incomplete and inaccurate information on upfront transitional was presented in programme business cases and take any necessary corrective action.
• Reviewing all major programmes that impose costs on taxpayers to ensure HMRC has correctly accounted for these costs when assessing the programmes’ economic benefits and financial affordability.

The Institute of Chartered Accountants in England and Wales (ICAEW) recently called for a rethink on MTD for Income Tax whilst the Public Accounts Committee has an ongoing Call for evidence about progress and both the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT) have noted that MTD SA places additional burdens on taxpayers.

Useful guides on this topic

MTD: Toolkit for accountants
What is the current timetable for Making Tax Digital (MTD)? How will it work? Which clients will be excluded? What planning needs to be undertaken?  

Making Tax Digital: Survival guide (for the self-employed & landlords)
A guide for the many self-employed taxpayers, company owners and property landlords who are unaware of HM Revenue and Custom's radical plans to transform the tax online filing system. 

Making Tax Digital: Index & timeline
When does Making Tax Digital (MTD) apply? What does Making Tax Digital really mean? How will it affect you? Does MTD mean quarterly reporting? Is my business exempted from Making Tax Digital?

External link

National Audit Office report: Value for money: Progress with marking Tax Digital