It was supposed to be the forward-thinking initiative that dragged the UK’s creaking tax system kicking and screaming into the 21st Century. But having seen implementation costs balloon to the region of £1.3bn, there are now serious question marks over the future of the HMRC’s flagship Making Tax Digital programme.
First announced in 2015, the aims of Making Tax Digital (MTD) are straightforward – to digitise tax administration for the UK’s three main business taxes (Corporation Tax, VAT and self-assessed Income Tax for the self-employed). By weaning the tax system off paper records and returns, which created mountains of paperwork for a small army of HMRC staff to contend with, the government argued that it would improve efficiency, reduce errors, achieve significant cost savings and maximise tax revenues.
And who could argue? Isn’t that what digital technology does, after all?
The original plan was to have a brand new digitised tax system up and running by 2020. By that date, all businesses would have to submit tax returns using an authorised software portal – no more paper returns, no more Excel spreadsheets. Moreover, all businesses would now have to submit quarterly returns for all taxes, not just VAT.
But according to a scathing report released by the National Audit Office (NAO) in June this year, it was clear that the Making Tax Digital juggernaut had veered badly off course as early as 2018. That year, the NAO reported that the government by that point accepted that the digital agenda would cost businesses rather than save them money.
Still, the scheme went live for VAT returns – for large corporations, at least – on schedule, as planned in 2019. Four years later, that is still as far as we have got.
Unrealistic and over-budget
In November 2022, the government officially paused trials of self-assessed Income Tax returns using the MTD platform. A month later, the proposed roll-out date for digital self-assessment was put back two years to April 2026 for sole traders earning more than £50,000, and to April 2027 for those earning between £30,000 and £50,000. No date has yet been set for general partnerships or for the digitisation of Corporation Tax.
And then came the NAO report. Among its key findings, it found that HMRC had:
- Set itself an unrealistic timeframe for the initial roll out
- Failed to adequately engage with commercial accounting software vendors whose platforms would have to integrate with the MTD platform to allow business users to access it
- Underestimated the implementation costs by £1bn – the original business case put the cost at £226m. The NAO blamed the enormous discrepancy on HMRC simply not factoring in certain costs when it initially drew up its plans
- Failed to disclose calculations that showed switching to the MTD system for VAT and self-assessed Income Tax would cost businesses with incomes over £10,000 a total of £1.5bn in transition costs.
So are all of these problems enough to breach MTD below the water line, dooming another expensive government initiative to vanish without trace?
What we do know is that the tax system will be fully digitised one day – that’s just the way the world is going, and the arguments for doing it remain sound.
How long Making Tax Digital in its current guise has left to run is, on the other hand, a very different question. Poorly planned, over budget, set to cost hard-pressed small businesses even more money as a cost of living crisis rages – with a general election to be fought between now and the delayed roll out for self-assessed Income Tax, it would be no surprise if that gets shelved. And it’s even less likely that the MTD plans for Corporation Tax will now ever be firmed up.
What is for sure is if tax digitisation is going to deliver on its promises, there needs to be more than a rebrand just to bury the tainted MTD name. Let’s hope HMRC has learnt the lessons and gets it right next time.