MTD Expected to Cost £1 Billion More Than Forecast

A report published by the National Audit Office (NAO) has found that HMRC’s Making Tax Digital (MTD) initiative is expected to cost around £1 billion more than its initial £226 million budget, which was forecast in 2016.

MTD is intended to modernise the tax system for income tax self assessment, VAT and corporation tax. It requires taxpayers to keep records digitally and submit quarterly tax returns.

Exclusion of ‘significant upfront costs’

In May 2022, a business case outlined by HMRC forecast total net ongoing MTD costs of around £900 million over five years. However, the NAO report revealed that HMRC had excluded significant upfront costs of £1.5 billion to self assessment and VAT taxpayers from the business case’s cost-benefit analysis.

According to the NAO report, these upfront costs included those associated with updating computerised systems and tax advice. The NAO said the inclusion of these costs in the initial business case would have shown that the combined cost to the government and taxpayers associated with MTD would have exceeded the forecast additional tax revenue.

HMRC doesn’t believe that the omissions would have resulted in alternative decisions being taken in regard to MTD.

‘Unrealistic plans’

The NAO report also labelled HMRC’s 2016 plan to implement MTD for self assessment, VAT and corporation tax by 2020 as ‘unrealistic’, with bosses failing to take the scale of the task into account.

In 2017 HMRC delayed changes to MTD for Income Tax Self Assessment (MTD for ITSA) to focus on MTD for VAT. As of March 2023, 3.2 million taxpayer VAT records had been migrated to HMRC’s MTD for VAT system. MTD for VAT for larger businesses was introduced on time in 2019, and MTD for VAT was introduced in 2022, three years later than originally planned.

In late 2022 the government delayed the timetable for MTD for ITSA, making this part of the initiative at least eight years behind HMRC’s original plan. The NAO said that this is due to hinderances associated with delivering MTD for VAT, which limited HMRC’s ability to create the MTD for ITSA system and support the development of commercial software.

Repeated delays

‘The repeated delays and rephasing of Making Tax Digital have undermined the programme’s credibility and increased its costs,’ said Gareth Davies, Head of the NAO. ‘They put at risk the support of taxpayers and delivery partners, including those who are essential to the programme succeeding.

‘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.’

The NAO has recommended that HMRC prepare a separate business case for MTD for ITSA so that those making decisions can better understand the costs, benefits and risks associated with the initiative. It has urged HMRC to include ‘greater clarity’ on how taxpayers will be affected.