Progress with Making Tax Digital
HMRC’s flagship tax transformation programme is now expected to cost five times the original forecast in 2016 (in real terms) following repeated delays. HMRC omitted significant costs to customers from some key business case documents seeking approval for further funding, according to a new report by the National Audit Office (NAO).
The report, Progress with Making Tax Digital, focuses on HMRC’s £1.3 billion programme to digitalise the tax system, which is currently expected to cost around £1 billion more than its 2016 budget of £226 million. The programme was designed to modernise HMRC’s systems for three business taxes – VAT, Income Tax Self Assessment and Corporation Tax – and require business taxpayers to keep and submit quarterly digital tax records. HMRC also intended to move its tax systems and records onto a modern tax management platform by 2020.
In its May 2022 business case, HMRC forecast total net ongoing costs to taxpayers of around £900 million over five years to comply with Making Tax Digital (MTD). However, the NAO found that, while HMRC had details in an annex, it excluded significant upfront costs of £1.5 billion to VAT and Self Assessment customers from the business case’s cost-benefit analysis. These costs related to customers updating their own systems and obtaining tax advice. This would have shown that the combined cost to the government and to customers of proceeding with MTD for Self Assessment would have exceeded the forecast additional tax revenue. Its March 2023 business case omitted upfront costs to customers entirely.1 HMRC does not believe these omissions would have resulted in different decisions being taken. In 2021 it published policy papers which estimated upfront costs to Self Assessment customers, and it has been able to show evidence that decision-makers were sighted on the upfront costs ahead of some key decisions.
The report also found that HMRC’s original 2016 plan to introduce MTD by 2020 – for VAT, Self- Assessment and Corporation Tax – was unrealistic, with the Department failing to assess the scale of work required from the outset.
In 2017 HMRC recognised that it could not meet its timetable given the complexities of MTD for Self Assessment, which will require some taxpayers to change their behaviour by using digital transactions, electronic record-keeping, and quarterly filing. It pushed back changes to Self Assessment to focus instead on VAT. By March 2023, 3.2 million VAT taxpayer records had been migrated to HMRC’s modern IT systems. HMRC introduced MTD for VAT for larger traders, accounting for 99% of VAT collected, on time in 2019. It introduced MTD for smaller traders in 2022, three years later than planned. In December 2022, on the advice of HMRC, the government pushed back the timetable for Self Assessment for the fourth time, further delaying benefits and increasing costs.2 MTD for Self Assessment is now at least eight years behind the original timetable. This is due to delays in delivering MTD for VAT, which reduced HMRC’s capacity to build its Self-Assessment system and support the development of commercial software, as well as the impact of Britain’s exit from the EU and the COVID-19 pandemic.
In addition, the NAO found that HMRC carried out very little testing for how MTD would work for Self Assessment. The pilot had limitations which restricted participants’ eligibility. HMRC had forecast more than 15,500 business taxpayers would join the pilot. Around a thousand taxpayers wanted to sign up for the pilot but most were ineligible, leaving only 15 participants when the pilot was closed to new entrants. HMRC has not yet resolved some design issues, including how to: allow for multiple agents to represent taxpayers; handle jointly owned property; and deal with changes in taxpayers’ circumstances.
Of the 17 million tax records that had to be moved from its costly legacy systems, HMRC has only moved 3 million so far and only set dates for moving 1.6 million others.
HMRC estimates MTD for VAT cost it around £295 million,3 £70 million more than it had originally expected the programme would cost for all three business taxes (VAT, Self Assessment and Corporation Tax). However, HMRC research indicates it is likely that MTD has contributed to generating additional VAT and estimated that this equated to £185 million to £195 million in 2019-20.
HMRC’s latest estimates indicate the programme could raise £3.9 billion in additional tax from reducing taxpayer errors.4 Our analysis of HMRC’s figures indicates the programme could achieve a return of around 2:1 when compared with costs to HMRC and customers.5 A further £1.6 billion of tax might be generated from those with Self Assessment business incomes of £10,000 to £30,000, if the government decides to extend MTD to these groups. The costs to these customers if they had to comply with MTD for Self Assessment could amount to £1.2 billion, an average of £460 each, and almost £1,000 for some self-employed businesses.6 HMRC has not assessed how many businesses will face different amounts of upfront costs.
HMRC’s ability to secure value for money from the remaining spend on MTD – forecast at £620 million at March 2023 – now depends on it: developing a more robust business case exploring the options for reducing costs; resolving questions about design and costs to customers; and rigorously managing delivery risks.
The NAO recommends 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.
It also recommends the HMRC works collaboratively with stakeholders on how best to create the new system and resolves questions around software.
“The repeated delays and rephasing of Making Tax Digital have undermined the programme’s credibility and increased its costs. They put at risk the support of taxpayers and delivery partners, including those who are essential to the programme succeeding.
"Our audit identified the omission of significant costs from some business cases. It is obviously important that business cases for major programmes such as this contain all the relevant information to support decision-making.
“HMRC’s plan to digitalise the tax system has the potential to improve the system’s efficiency and effectiveness. It has made some recent progress on VAT but it has not yet tackled the most complex elements of the programme and significant delivery risks remain.”
Gareth Davies, the head of the NAO