Making Tax Digital – National Audit Office releases value for money report

The National Audit Office (NAO) has published its latest value for money report on the Making Tax Digital (MTD) project – and it lays out the challenges faced by the delayed MTD for Income Tax Self Assessment (ITSA).

The NAO’s conclusions include:

• HMRC’s original plan to introduce MTD (VAT, ITSA and Corporation Tax) by 2020 was unrealistic. Timeframes were agreed before options were fully explored, leading to HMRC trying to implement digital record keeping for business taxpayers while simultaneously replacing its own legacy systems.
• MTD for VAT was introduced in 2019 for large traders, with smaller traders joining in 2022 – but the changes for VAT alone cost HMRC £70 million more than it had earmarked for the whole MTD project.
• MTD for VAT is probably generating additional tax revenue – but it’s difficult to separate MTD’s impact from other factors, including increased controls introduced with the new VAT service from August 2022.
• MTD for ITSA, originally due by 2018, was first delayed to 2020, then 2024, then 2026 and 2027 (depending on income thresholds). It’s now at least eight years behind HMRC’s original timetable, and questions remain over how it will handle multiple agents, jointly owned property and changes in taxpayer circumstances.
• HMRC’s latest estimated cost for MTD has increased to £1.3 billion, with £642 million spent as of March 2023.
• HMRC’s latest MTD business cases have excluded the cost to the taxpayer – including significant upfront costs. In 2021, HMRC estimated the average transitional cost for affected businesses would be £330, but it did not include any such costs in its March 2023 business case – and its May 2022 business case left £1.5 billion of transitional costs for VAT and Self Assessment customers out of its cost-benefit analysis.
• Stakeholders want HMRC to be more collaborative and transparent about the MTD project, and to be meaningfully involved on design decisions.
• Until tax records for Corporation Tax and Self Assessment taxpayers with income below £30,000 have been migrated to HMRC’s modern tax management platform, HMRC will need to maintain most legacy systems, retaining the associated costs and complexity of doing so.

HMRC’s Chief Executive and First Permanent Secretary Jim Harra has publicly responded to the NAO report, welcoming their scrutiny and emphasising the importance of stakeholders to MTD’s success. Mr Harra acknowledged the challenges faced by the MTD project, including delays and cost increases, but argued that MTD will be cost-beneficial over its full investment appraisal period, and benefits resulting from MTD will outweigh transition costs for businesses and business owners.

The NAO’s report closes by acknowledging in-principle support for digitalisation, "provided it makes it easier to pay tax". Delays and rephasing have undermined credibility and increased costs, and the NAO recognises "a risk that delivery partners and taxpayers disengage from a programme that can only succeed if those groups significantly change their behaviour".

The NAO’s recommendation, that HMRC develop a more robust business case exploring the options for progressing MTD, including resolving questions around design and implementation, is one the IFA agrees with. Increased collaboration with professional bodies and other relevant stakeholders, where the IFA will continue to be involved and ensure small business and small practice voices are heard, will be essential to getting MTD for ITSA back on track. Whether HMRC have the resources to dedicate to the systematic review of the MTD project the NAO recommend is another question entirely.

Matt Barton is IFA Technical Manager.