Making Tax Digital costs spiral to £1.3bn for HMRC

The rollout of Making Tax Digital is expected to cost HMRC five times the original forecast in 2016 following repeated delays

The digitalisation of tax will cost HMRC £1.3bn, more than £1bn above the original budget of £226m, according to a report by the National Audit Office (NAO). So far HMRC has spent £642m on developing Making Tax Digital (MTD).

From the outset, the NAO said HMRC had set ‘unrealistic’ ambitions and timescales, with ‘unknown levels of risk’. It also underestimated the complexity involved in moving from its own legacy systems and had not fully understood the scale of the challenge of moving data and systems when it prepared its initial business case.

In its May 2022 business case, HMRC forecasted total net ongoing costs to taxpayers of around £900m over five years to comply with MTD.

However, the NAO found that HMRC excluded significant upfront costs of £1.5bn to VAT and self assessment taxpayers from the business case’s cost-benefit analysis.

These costs related to taxpayers updating their own systems and obtaining tax advice. This would have shown that the combined cost to the government and to taxpayers of proceeding with MTD for self assessment would have exceeded the forecast additional tax revenue.

The business case left out upfront costs to taxpayers entirely, although HMRC claimed these omissions would not have resulted in different decisions being taken.

The NAO report also found that HMRC’s original 2016 plan to introduce MTD by 2020 - for VAT, self assessment and corporation tax - was unrealistic, with the tax authority failing to assess the scale of work required from the outset.

In 2016 HMRC had expected MTD would generate an annual return of £600m in additional tax revenue from VAT and self assessment by 2020-21. It now expects to reach this level in 2027-28.

MTD for self assessment is now at least eight years behind the original timetable. This is due to delays in delivering MTD for VAT, which reduced HMRC’s capacity to build its self assessment system and support the development of commercial software, as well as the impact of Brexit and the pandemic.

In addition, the NAO found that HMRC had carried out very little testing for how MTD would work for self assessment. The pilot had limitations which restricted participants’ eligibility. HMRC had forecast more than 15,500 business taxpayers would join the pilot. Around a thousand taxpayers wanted to sign up for the pilot but most were ineligible, leaving only 15 participants when the pilot was closed to new entrants. The pilot has now been put on hold and is being reviewed by HMRC.

The NAO recommends that HMRC should 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.

It also needs to prioritise resolving the outstanding technical issues including how taxpayers with different year-ends or jointly-let property, or those represented by multiple agents, will be able to report under the system. It also needs to run an effective pilot to demonstrate how the arrangements would work in practice for taxpayers, their agents and HMRC.

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. They put at risk the support of taxpayers and delivery partners, including those who are essential to the programme succeeding.

‘Our 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.

‘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.’

In response to the report, Meg Hillier MP, chair of the Public Accounts Committee, said: ‘Making Tax Digital by 2020 was never viable. HMRC wanted to increase tax revenue, but completely underestimated the cost and scale of work required to move from its legacy systems and by business taxpayers to move to digital records.

‘Eight years on, many tax professionals remain unconvinced by the proposed approach, which imposes significant costs and burdens on many self assessment business taxpayers. HMRC has omitted much of these costs to business taxpayers when seeking additional funding. It now needs to demonstrate its plans add up.’

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