Delays, omissions and spiraling costs: Is Making Tax Digital out of control?

Delays, omissions and spiraling costs: Is Making Tax Digital out of control?

The National Audit Office (NAO) published its report, ‘Progress with Making Tax Digital’, on 12 June. We were well aware of the delays to the implementation of the Making Tax Digital (MTD) project, and it would therefore be a reasonable assumption that costs to the public purse would be much higher than originally anticipated. The report not only confirms this assumption but highlights how HMRC’s costs will be five times higher than those they originally forecast! Furthermore, the NAO found that HMRC has omitted upfront costs to businesses from its costings.

Delays

It will be no surprise to those in our industry that the NAO found HMRC’s 2016 plan to digitise VAT, self-assessment and corporation tax by 2020 was too ambitious. According to the report, HMRC failed to assess the scale of work required from the outset. We must note at this stage that this is despite feedback and evidence presented by accountancy professional bodies and others to the contrary!

In 2017 HMRC pushed back the implementation of MTD for Income Tax having decided to focus on the implementation of MTD for VAT. MTD for VAT was mandated for all VAT-registered businesses in 2022, three years later than planned. In December 2022, further delays to MTD for Income Tax were announced.

Spiralling costs

Overall, MTD is expected to cost HMRC (and therefore the taxpayer) five times more than their original 2016 forecast. In this forecast, the overall cost was predicted to be £226 million; the NAO’s finding is that the expected cost is around £1 billion more.

HMRC estimates MTD for VAT cost it around £322 million in real terms, £70 million more than it had originally expected the programme would cost for VAT, Self Assessment and Corporation Tax combined. This is a significant budgeting and forecasting error.

Omissions

In addition to costs incurred by HMRC further expense is incurred by individuals and businesses themselves in complying with the regime.

Being mandated to comply with MTD involves upfront costs for businesses. These costs cover upgrading accounting systems and obtaining tax advice (not to mention dealing with the upcoming 2023/24 transition in basis periods to a tax year basis!). The NAO found that £1.5 billion of such upfront costs were excluded from a cost-benefit analysis in a May 2022 business case and that upfront costs were missing altogether from a March 2023 business case. HMRC are keen to point out that they published these costs separately and that their omission from the business cases would not have affected the decision makers’ decision to award further funding to the MTD project. Nevertheless, £1.5 billion is a glaring omission!

What happens now?

The NAO report makes the following recommendations to HMRC:

• Develop a more robust business case exploring the options for reducing costs; resolving questions about design and costs to customers; and rigorously managing delivery risks;

• 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; and

• Work collaboratively with stakeholders on how best to create the new system and resolve questions around software.

Speaking for us at 20:20 Innovation, we’d also like to see genuine debate and costings around the benefit of quarterly reporting. Is this really a carrot for better quality record keeping and having improved visibility of business results and cashflow?

We must also recognise that technological and AI advances have been significant since this project started in 2016. As we move ahead, we must ensure we take advantage of all possible routes to allow efficient compliance and wider business management benefits (including understanding of cashflow and business planning). After all, as some attribute to Einstein, "insanity" can be described as “doing the same thing repeatedly and expecting a different result”.

Gareth Davies, Head of the NAO said, “The repeated delays and rephasing of Making Tax Digital have undermined the programme’s credibility and increased its costs.” Now we are heading towards the revised implementation date of MTD for Income Tax in April 2026, we should hope that those responsible for delivering MTD take on board the NAO’s recommendations.

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