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Recurring delays and constant changes to the government’s flagship Making Tax Digital (MTD) programme has undermined its credibility, according to the National Audit Office (NAO).
HM Revenue and Customs’ (HMRC) MTD programme, which aims to digitise the UK tax system, was originally due to be fully completed by 2020. However, the department has continually rephased and moved the timeline, while the scale of the work needed remains uncertain, an NAO report has found.
On 1 April 2019, HMRC began to roll out MTD, but only for VAT returns for businesses with a taxable turnover of more than £85,000.
Three years earlier, in 2016, HMRC had predicted that VAT returns and MTD for Self Assessment, the latter which was originally due to be launched in 2018, would generate £600m yearly in additional tax revenue by 2020-21. However, HMRC now estimates that it will be 2027-28 before it reaches that level.
When MTD was officially announced in 2016, the government estimated the programme would cost £226m. The latest estimate now sits at £1.3bn, more than five times the original figure.
“HMRC’s initial timeframe for MTD was unrealistic. It did not allow sufficient time for HMRC to explore the full range of options that would achieve the programme’s aims and select one that it could implement,” the report said.
“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.”
Another issue is that HMRC’s business cases have failed to include significant costs to customers from its cost-benefit analysis, while MTD was originally approved because it was expected to reduce the burden on taxpayers.
This includes the department’s May 2022 business case which “contained the most significant omission, with around £1.5bn of forecast costs to VAT and Self Assessment customers excluded from the cost-benefit analysis”, according to the NAO report.
“The business case should have shown that the combined costs to HMRC and customers of proceeding with MTD for Self Assessment were greater than the additional tax revenue expected. HMRC told us that it did not believe presenting the upfront transitional costs to customers within the cost-benefit analysis would have resulted in any different decisions being taken.”
MTD for Self Assessment is the key part of the programme running eight years behind schedule. It was originally due to be rolled out from 2018, and in 2017 HMRC launched a pilot of Self Assessment.
However, the actual piloting was limited. Since 2017, more than a thousand taxpayers signed up to the pilot, but only 15 participants had passed the eligibility criteria when the pilot closed to new entrants in 2022.
In December 2022, HMRC made the decision to delay the timetable for the roll-out for the fourth time, “delaying benefits and increasing costs further”, and decided to take a phased approach to the deployment.
“HMRC has set a very challenging plan to implement Making Tax Digital for Self Assessment from 2026-27, delivering many aspects of the programme in parallel. The scale of work required remains uncertain. HMRC’s plans still require it to simultaneously move from legacy systems to a modern platform and introduce digital record keeping by business taxpayers,” the report said.
“It has not been able to provide us with any measures of progress to the end of 2022, so it is not clear how much its investment to date has advanced its system development. HMRC’s current plans indicate it has major work to complete on all the significant elements (restarting its pilot with business taxpayers, moving tax systems and records, and changing its internal processes), and this must all be done in parallel.”
The NAO has recommended that HMRC creates a separate business case for MTD for Self Assessment to fully understand the costs, benefits and delivery risks associated with the programme.
HMRC has yet to set a timetable for extending digital record keeping requirements for self assessment for general partnerships or businesses paying Corporation Tax, the report added, stating: “In 2021, HMRC considered that it was unlikely to be possible to mandate digital Corporation Tax returns by 2030.”
NAO head Gareth Davies said the NAO’s 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,” he said.
“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 Chartered Institute of Taxation (CIOT) and Association of Taxation Technicians (ATT) have called the MTD programme “out of control”, calling on HMRC to review the business case for the programme.
Alison Kerrey, chair of the hoing CIOT and ATT digitalisation and agent services committee, said that while the committee supports digitisation, the government’s execution of the programme “feels like it is out of control, with spiralling costs, unrealistic timescales, and questionable benefits”.
“To announce a project as substantial as MTD, with significant impacts for businesses, agents, software companies and HMRC themselves, without being able to point to a proper business case beforehand, simply beggars belief,” she said.
“And then, just three months ago, to omit such massive sums from the cost-benefit analysis is equally remarkable. You wonder how HMRC would react, and the behaviour they would infer, if a taxpayer had made a similar omission from their returns.”
She added that in one year, transferring VAT records onto the new systems created errors totalling more than the department is expected to generate by 2033-34.
“Errors are precisely what MTD is seeking to minimise, not introduce, and this further underlines the need for thorough testing before any additional MTD requirements are introduced,” she said.
In 2020, the Public Accounts Committee (PAC) warned that MTD could impose unreasonable costs on taxpayers.
Read more about HMRC and Making Tax Digital
- The Association of Accounting Technicians calls for improvements to HM Revenue and Customs’ Making Tax Digital programme, and says the exemption threshold, currently at £10,000, should be raised.
- Public Accounts Committee calls on HMRC to assess whether the administrative burden placed on taxpayers through its Making Tax Digital programme is reasonable before continuing to roll it out.
- Digital tax changes have been delayed to allow more time for customers taking part in the pilot and for the government to enhance the service.