HMRC’s Making Tax Digital programme faces scrutiny

HMRC’s Making Tax Digital programme is now expected to cost around five times its original forecast (in real terms), according to an investigation by the National Audit Office (NAO).

The NAO has published its Progress with Making Tax Digital report, which focuses on HMRC’s £1.3 billion digital transformation of the tax system. The project is currently expected to cost around £1 billion more than its 2016 budget of £226 million.

Overview of Making Tax Digital

Making Tax Digital (MTD) aims to modernise HMRC’s systems for three business taxes: VAT, income tax self-assessment, and corporation tax.

The scheme requires business taxpayers to keep and submit quarterly digital tax records. And HMRC had planned to move its tax systems and records onto a modern tax management platform by 2020.

What does the National Audit Office report say?

The key findings of the Progress with Making Tax Digital report are:

• HMRC’s vision to digitalise the tax system has the potential to bring about a step-change in the system’s efficiency and effectiveness. The principle of digitalising tax has broad support among stakeholders provided it makes it easier to pay tax.
• HMRC launched digital record keeping for VAT for larger businesses on time, but it needed more time to move taxpayer records off legacy systems due to the extent of data issues it had to deal with.
• The tax authority’s initial timeframe for MTD was unrealistic. It didn’t allow sufficient time for it to explore the full range of options that would achieve the programme’s aims and select one that it could implement.
• Each announcement has set an ambitious timeframe for delivery, with several aspects of the MTD programme to be delivered in parallel. The repeated delays and rephasing of MTD has undermined its credibility and increased its costs. There is a risk that delivery partners and taxpayers disengage from a programme that can only succeed if those groups significantly change their behaviour. Higher costs weren’t inevitable, had HMRC taken more time to plan and consider the realism of the options.
• HMRC hasn’t demonstrated the programme offers the best value for money for digitalising the tax system, with later business cases significantly underplaying the total cost to customers of making the change. The programme should now develop a robust business case that includes a comprehensive and up-to-date assessment of the costs to customers of implementing MTD. Planning has been too high level and the risk remains that further delays will add costs and defer benefits.
• HMRC is reviewing how MTD will work for businesses and landlords with lower self-assessment income. It should take this opportunity to assess how far the programme is improving services, reducing burdens, and making the tax system easier to comply with. And it should use lessons from this review to ensure the wider programme is finally on track to secure the benefits it’s long promised.

Making Tax Digital costs

In its May 2022 business case, HMRC forecast total net ongoing costs to taxpayers of around £900 million over five years to comply with MTD.

But the NAO found that, while HMRC had details in an annex, it left out 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 getting tax advice. This would have shown the combined cost to the Government, and to taxpayers, of proceeding with MTD for self-assessment would have exceeded the forecast extra tax revenue.

The NAO investigation found the tax authority’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 start.

Gareth Davies, the head of the NAO, said: “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.”

Public Accounts Committee inquiry

The Public Accounts Committee is holding an inquiry on the progress of Making Tax Digital.

On Monday 19 June, the committee will question Jim Harra, First Permanent Secretary and Chief Executive at HMRC, on the progress towards MTD and whether the latest plans provide confidence the programme will deliver value for money.

Our thoughts on the Progress with Making Tax Digital report

To date, HMRC has made many mistakes in the creation of its digital tax platform and has at times been overly ambitious. Unfortunately, this has led to a lot of confusion about timeframes and what steps people are meant to take to get their tax affairs in order. And sadly, confusion among taxpayers doesn’t lead to good compliance.

HMRC must therefore be more sensible with the targets it sets, to ensure they’re achievable and that its timetable is properly communicated.

It will be a long transition period as taxpayers begin to understand the new system and as HMRC builds more sophisticated systems that serve the ultimate purpose of providing accuracy and transparency.

It’s a mammoth task to bring the tax system fully into the 21st century from a compliance point of view. But once everything is in place, it should be easier for taxpayers and HMRC to work together to ensure a fair and simpler tax system…

…although we still have some time to wait!