Government's flagship digital tax scheme five times over budget and three years late, NAO
'The repeated delays and rephasing of Making Tax Digital have undermined the programme's credibility,' watchdog says
Making Tax Digital, the government's flagship programme to digitise the tax system, is facing severe delays and cost overruns, according to a report by the National Audit Office (NAO).
Making Tax Digital (MTD), announced under David Cameron's administration in 2015 and implemented and managed by HMRC, is part of the government's overall Tax Administration Strategy.
MTD aims to "reduce the tax gap," by requiring businesses and individuals to keep digital tax records using compliant software and submit them online. MTD covers key business taxes including VAT, income tax self-assessment and corporation tax. Under the new system, larger businesses will be required to provide quarterly updates to HMRC or face penalties.
Originally planned to bring an end to the traditional paper tax return by 2020, the programme has been beset by delays. It is now three years behind schedule and more than £1 billion over budget.
A report published by the NAO on Monday is strongly critical about the programme's progress and its mounting cost burden, not only to taxpayers but also to businesses, which will need to upgrade their accounting systems to the tune of hundreds of pounds each.
MTD has been postponed four times. Only 3.2 million tax records have been transferred to the new system out of a total of 14 million. While some elements, such as VAT, have been processed using the new technology since 2019, self-assessment has proven more complex and has experienced continued delays. HMRC now aims to implement the digital tax regime for self-assessment by 2027.
Delays in implementation have meant the programme is likely to cost five times the 2016 estimate of £226 million, with the final figure close to £1.3 billion.
In addition to increased costs to the taxpayer, the NAO estimates that businesses will need to spend a total of £1.5 billion to comply with the new system, adjusting tax planning, updating software and seeking advice. It accuses the HMRC of underplaying this figure in its 2022 business case for the project and ignoring it completely in its submissions this year.
"This would have shown that the combined cost to the government and to customers of proceeding with MTD for self assessment would have exceeded the forecast additional tax revenue. Its March 2023 business case omitted upfront costs to customers entirely," a release accompanying the NAO report says.
Despite this, however, the NAO predicts the scheme will deliver a positive financial return.
The spending watchdog cautions that delivering on the 2027 target for self-assessment still presents significant challenges. It recommends that HMRC make a separate business case for that troublesome portion of the programme, so the risks can be better understood by policymakers.
"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," said head of NAO Gareth Davies.
"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."
HMRC estimates that the digitisation of taxes could generate £3.9 billion in additional revenue by 2033, as a result of fewer errors and more accurate tax reporting.
An HMRC spokesperson said: "A project of this scale naturally comes with challenges, but Making Tax Digital will deliver a strong return on investment for the taxpayer. We have always been wholly transparent about costs for business.
"We remain committed to ensuring that free software will be available for those with the simplest tax affairs. This is reflected in our estimates."