Making Tax Digital explained: Everything you need to know

What is Making Tax Digital?

Making Tax Digital is the overall umbrella term for the government’s major digitisation of the UK tax system. The scheme was introduced as a way of making it easier to file tax returns, helping businesses and individuals reduce errors leading to tax overpayment or underpayment, and reducing tax evasion.

The programme was launched in 2015 as a five-year programme – however, the current timeline has a completion date of 2027. Mistakes reportedly accounted for a £33bn “tax gap” in 2016-17, which is the difference between what the exchequer expected to receive and what was paid. That figure was reduced to £8.5bn in 2018-19 after changes made by MTD, according to HMRC.

The first part of the programme was the Personal Tax Account, which was launched in December 2015 as a “one-stop shop” for individuals’ tax information. Another part of the programme is MTD for VAT, which was introduced for businesses with a taxable turnover of more than £85,000. This went live in April 2019, despite calls to delay for at least a year as small businesses weren’t ready.

MTD for Income Tax (originally called MTD for Self Assessment) is the last piece of the puzzle, and will apply to sole trader businesses with an income above £50,000 from April 2026, while those earning above £30,000 will have to comply with the scheme and file taxes digitally from April 2027.

How has the Making Tax Digital programme been received?

From the very beginning, the programme has been haunted by critics. Back in 2015, before the programme had even officially launched, there were concerns that MTD would leave behind those who were not digitally savvy, with an estimated 10 million users needing assistance in using digital tax services due to lack of internet, disabilities or lack of skills.

MTD for Self Assessment, due to be implemented for those businesses below the VAT threshold, was originally meant to be rolled out in 2018. However, the criticism continued, and in 2017, both the Commons Treasury Committee and the Lords’ Economic Affairs Committee called for the government to delay the programme. The government took heed and promised to delay the wider MTD programme until 2020, including asking businesses to keep digital records, but would still mandate businesses with a turnover above the £85,000 VAT threshold to provide VAT returns through online software.

It didn’t stop there. Ahead of April 2019, when businesses would have to begin filing tax returns digitally, sceptics were again concerned, particularly about the burden this places on small and medium-sized enterprises (SMEs).

In November 2018, the Lords’ Economic Affairs Committee called on HMRC to halt the planned go-live of MTD for VAT, stating that as many as 40% of businesses that would be affected by the programme hadn’t even heard of it and were nowhere near ready to change their accounting processes. HMRC, however, was confident the over one million businesses involved would be ready, and while many public sector organisations were being offered a six-month deferral, there was no such grace period for SMEs.

The changeover to digital tax was difficult, particularly for smaller businesses, with many incurring extra costs to upgrade or procure accounting software and train staff

Despite HMRC running pilots that allowed firms to test out the new ways of submitting tax, the changeover to digital tax was difficult, particularly for smaller businesses, with many incurring extra costs to upgrade or procure accounting software and train staff.

In July 2020, in the midst of the Covid-19 Coronavirus pandemic, HMRC announced it would be extending MTD in April 2022 to include businesses below the VAT threshold, while individuals with an income of more than £10,000 a year would be required to file online income tax self-assessments by April 2023.

At the time, then-financial secretary to the Treasury Jesse Norman penned an article for Computer Weekly, calling this a “radical transformation in customer service”.

“Personal and business tax accounts will be brought together into a seamless service. The flow of information will move much closer to real time, and HMRC will have a strengthened capability to make the payments that have been so crucial in responding to the impacts of Covid-19.”

However, not everyone agreed. The Association of Accounting Technicians (AAT) called on the tax authority to make changes to the programme ahead of its introduction, wanting to increase the threshold to £12,500 to make it the same level as the personal allowance.

At the time of writing, HMRC has no current plans to introduce MTD for those earning less than £30,000 per annum. More on this later.

Since the July 2020 announcement, there have been several changes to the programme, which have also caused criticism.

Why has MTD been subject to such scrutiny?

Any large government programme is subject to significant scrutiny, from the public to Parliament and everyone in between.

The committee whose job it is to examine the value for money and effectiveness of government projects, the Public Accounts Committee (PAC), has been a regular critic of the tax authority’s flagship programme.

One of the main criticisms MTD has faced is the uncertainty of its success. While its mission makes sense, the PAC has time and time again questioned its actual savings. In 2020, a PAC report stated: “It is not clear that MTD will help reduce the tax gap or taxpayer costs at a time when individual taxpayers and small businesses are under considerable pressure.”

At the same time, a survey by the Chartered Institute of Taxation (CIOT) and the Association of Taxation Technicians (ATT), carried out in December 2019 and January 2020, suggested that the costs to businesses of complying with the programme far exceeded the original government estimates.

Exactly how much it would cost was not known at the time. In May 2022, HMRC submitted a renewed business case for MTD to HM Treasury. However, in June 2023, a report from the National Audit Office (NAO), revealed that the tax authority had omitted significant costs to customers from its cost-benefit analysis in the business case. In fact, the forecast costs to VAT and Self Assessment customers to comply with the new arrangements currently sit at around £1.5bn.

“Imposing significant additional burdens on customers in the middle of a cost-of-living crisis could not be less welcome. HMRC must now look up from what it is doing and research what services customers would actually find most helpful.”

This received significant criticism, including from the PAC, which said: “HMRC has lost sight of its original aim to reduce the burden on taxpayers and is increasing the burdens it imposes by asking Self Assessment taxpayers to pay for third-party software and file tax returns quarterly.”

PAC chair Meg Hillier said that instead of making it easier for customers, the committee is concerned the department is “succeeding in making tax difficult”.

“Imposing significant additional burdens on customers in the middle of a cost-of-living crisis could not be less welcome. HMRC must now look up from what it is doing and research what services customers would actually find most helpful.”

The CIOT and the ATT, which had carried out their survey back in 2019-20 and had already predicted that the costs were more than originally estimated, were also unhappy about the omission.

Another criticism has been the changes and delays to the programme. Originally, MTD for Self Assessment was due to be rolled out in 2018.

In fact, HMRC was so confident, it launched a pilot to help customers prepare. However, although more than 1,000 taxpayers signed up, only 15 participants passed the eligibility criteria before the pilot closed in 2022.

The timeline for Self Assessment has changed four times, and is now more than eight years behind schedule and estimated to be completed by 2027.

The NAO has criticised the department for having an initial unrealistic timeframe, and is still dubious the current timeline will stand.

“HMRC has set a very challenging plan to implement Making Tax Digital for Self Assessment from 2026-27, delivering many aspects of the programme in parallel. The scale of work required remains uncertain.

“HMRC has set a very challenging plan to implement Making Tax Digital for Self Assessment from 2026-27, delivering many aspects of the programme in parallel. The scale of work required remains uncertain. HMRC’s plans still require it to simultaneously move from legacy systems to a modern platform and introduce digital record keeping by business taxpayers,” the June 2023 NAO report said.

The costs of the programme have also been scrutinised. Originally set at £226m, HMRC has spent more than £600m so far, and the estimated cost during the lifetime of the programme is more than £1.3bn.

Why has Making Tax Digital been so difficult to implement?

One of the reasons for the increased costs and delays is Brexit. HMRC was under significant pressure to ensure the UK was ready for new post-Brexit customs protocols, including the roll-out of the Customs Declaration Service (CDS). It was forced to put a number of projects on hold to focus on the departure from the European Union (EU), including several elements of MTD.

The programme has struggled to run in parallel with several other projects, including the department’s exit from its legacy Aspire contract, as well as the Covid-19 pandemic impacting the programme when several staff had to be redeployed.

However, according to the NAO, blunders in the programme were present from the start, as timelines were agreed before HMRC had explored the range of options available. The current implementation plan is still seen as challenging, with major work to be completed.