HM Revenue and Customs’ Making Tax Digital (MTD) programme is now expected to cost more than five times its original forecast value, according to a new report by the National Audit Office (NAO).
Titled Progress with Making Tax Digital, it says the programme to digitalise the tax system is now valued at £1.3 billion, up from £226 million when it was launched in 2016.
The increase has been attributed to unrealistic original plans, insufficient testing in some areas and gaps in the business case.
The programme was designed to modernise HMRC’s systems for three business taxes – VAT, income tax self-assessment and corporation tax – and require business taxpayers to keep and submit quarterly digital tax records. HMRC also intended to move its tax systems and records onto a modern tax management platform by 2020.
The report says that this was to prove unrealistic as the department failed to assess the scale of work required from the outset.
Self-assessment complexities
In 2017 it recognised it could not meet its timetable for the wider digitisation of self-assessment, given the complexities of requiring some taxpayers to change their behaviour, so switched the focus to VAT, following which there have been further delays in the workstream around self-assessment.
In addition, the NAO found that HMRC carried out very little testing for how MTD would work for self-assessment, largely because the pilot had limitations which restricted participants’ eligibility, leaving only 15 to take part.
HMRC has not yet resolved some design issues, including how to: allow for multiple agents to represent taxpayers; handle jointly owned property; and deal with changes in taxpayers’ circumstances. Of the 17 million tax records that had to be moved from its costly legacy systems, the department has only moved three million so far and only set dates for moving 1.6 million others.
The NAO indicates that the programme could still deliver significant returns on investment., raising around £3.9 billion in additional tax by reducing taxpayer errors. A further £1.6 billion of tax might be generated from those with self-assessment business incomes of £10,000 to £30,000, if the Government decides to extend MTD to these groups.
HMRC’s ability to secure value for money from the remaining spend on MTD now depends on it: developing a more robust business case exploring the options for reducing costs; resolving questions about design and costs to customers; and rigorously managing delivery risks.
New business case
In response, 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 recommends that the department works collaboratively with stakeholders on how best to create the new system and resolves questions around software.
Gareth Davies, the head of the NAO, commented: “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.”
