Making Tax Digital is at a turning point

What HMRC needs to do in the wake of the Public Accounts Committee’s damning report.

Last week the Public Accounts Committee (PAC) issued an update report on the progress of HMRC’s flagship policy, Making Tax Digital. MTD was originally intended to deliver benefits both to HMRC and taxpayers by making the tax regime more efficient and delivering a simpler, faster system that will be easier for taxpayers to use.

It’s no overstatement to call the Committee’s report of HMRC’s progress so far damning.

It lays out at length the Committee’s disquiet over the development and deployment of the latest iteration of MTD, which focuses on Income Tax for Self Assessment (ITSA) and VAT.

Its concerns cover everything from timing and complexity to commitment and cost. “Seven years in,” the Committee writes, “With £640 million of taxpayer’s money spent, we are concerned that the final bill for the programme could end up much higher than HMRC’s latest forecast of £1.3 billion.”

And while it recognises that changes for MTD for ITSA are much more complex, the Committee pulls no punches in criticising HMRC’s failures, which include underestimating the scale of challenge in digitalising the system resulting in delays and spiralling costs. Now running eight years late for ITSA, with delivery pushed back to 2026 as announced in Dec 2022.

As stated in the report, HMRC delivered some success with the MTD for VAT, estimating that this generates approximately £400 million a year in additional tax revenue. And there’s no doubt that MTD for ITSA is a big job: as the committee points out, there are an estimated 11 million Self Assessment tax records that will need to be quality checked and moved to HMRC’s new system, 7.8 million more than for VAT. The scheme needed not only adequate resourcing, but a staunch commitment from those in charge at HMRC to follow through on promises.

But the evidence laid out in this latest report will test even HMRCs most ardent supporters.

A damning verdict

There is no requirement to read between the lines to discern the PAC’s serious misgivings.

The PAC laid out a number of pressing requests. It asks that HMRC:

• urgently test that its existing plans are sufficiently detailed and rigorous to ensure the successful delivery of the remainder of the programme;
• specify in detail how it will hold senior leaders accountable for delivering against the programme’s timetable and budget;
• work with its programme stakeholders including customers, tax agents and software providers to resolve design issues;
• and, by summer 2024, undertake and publish a robust assessment of how much difference to tax revenue is made by (i) more frequent submissions of Self Assessment data and (ii) by digital submissions.

There are other demands but even a cursory glance at these few demonstrate how far HMRC has fallen short on its initial assessments and commitments to MTD delivery.

From AAT’s viewpoint, the progress status of the MTD programme is disappointing, to say the least. We have staunchly supported MTD and its objectives. We believe that harnessing technology in an intelligent way is the best way of updating, streamlining and simplifying the tax system in this country.

Along with other accounting bodies, we have stood alongside HMRC in its push towards the widespread adoption of MTD. We have worked with other stakeholders to feed into the process at every step, and kept our members up to date on the latest developments, presenting a balanced view even when further delays and resultant confusion threatened to stymie the process.

With that said, we also expressed concern about the timescales for delivery from the outset, something we reinforced in the evidence we submitted to the PAC inquiry earlier in the year. The successive delays have dented business confidence in MTD – and that confidence is a fragile thing in short supply in the current climate.

This is compounded when taken in conjunction with the PAC’s view that the programme is in fact running counter to the principle of tax simplification and is instead creating unhelpful confusion and complexity. The Committee also highlighted concerns that the programme will impose additional burdens and costs on customers with taxpayers will be asked to spend more and do more to comply.

A certain future

So where next? First, there must be no further delays, and HMRC should set a definitive timeline for implementation. This is vital not only to save time and money, but also to avoid much of MTD technology solutions becoming obsolete by the time they are introduced.

We would also welcome independent oversight of HMRC’s approach in order to ensure that simplification is being delivered rather than simply digitalisation. Then, HMRC must invest in building greater awareness of MTD among small businesses. For context, last year, 85% of AAT Licensed Accountants believed the ITSA registration process was not well understood or only understood with the help of an accountant or other professional.

Finally, HMRC must properly resource its customer services – an issue that extends beyond just MTD to cover most of its current operations and responsibilities.

Delivering such a significant project was never going to be easy. Digitising a tax system to serve millions of users is a big job and is bound to be challenging. But wishful thinking, poor planning, muddled messaging and confused strategy are bound to make a tough job impossible. The recent HS2 debacle illustrates this with painful clarity.

There is still time to save MTD. There are a lot of stakeholders invested in its success, a lot of resources ready to be deployed, and a lot of determination to help deliver it. Eyes now fall on HMRC to deliver.

Action – swift, realistic and committed – is needed urgently.

Adam Harper is AAT's Director of Professional Standards & Policy..