Making Tax Digital could impose unreasonable costs on taxpayers, says PAC

HM Revenue and Customs’ (HMRC) Making Tax Digital (MTD) programme may not help reduce the tax gap or taxpayer costs and could place extra costs on taxpayers and small businesses, according to Parliament’s Public Accounts Committee (PAC).

A report by the PAC found that although the programme – HMRC’s major digitisation of the UK tax system – is an ambitious and logical plan, the committee is uncertain of its success.

The aim of MTD is to reduce the tax gap caused by errors and failure to take reasonable care among small businesses.

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 actually paid. That figure was reduced to £8.5bn in 2018-19 after the changes made by MTD.

The PAC report said that “the effectiveness of the programme is not yet known,” although HMRC is confident it will achieve its goals of “improving compliance rates, increasing productivity of businesses and allowing HMRC to realise savings”.

“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,” the PAC said.

It added that a survey of businesses and agents, carried out by the Chartered Institute of Taxation and the Association of Taxation Technicians in December 2019 and January 2020, “raised doubts about the effectiveness of Making Tax Digital in reducing errors and increasing productivity as expected by the government”.

“The survey findings also suggest costs to business of complying with the programme far exceed government estimates,” said the report.

“The MTD programme is a logical plan in a world where more and more activity is carried out digitally, but it will impose extra, and possibly unreasonable, costs on some individual taxpayers and small businesses, and may be disproportionate to the gain to HMRC. Some of these businesses may be less able to afford the changes since Covid-19.”

MTD was introduced on 1 April 2019 for VAT returns for businesses with a taxable turnover of more than £85,000.

In July 2020, HMRC announced it was extending the MTD programme to cover businesses below the VAT threshold and individuals filing income tax self-assessments.

In April 2022, HMRC will begin introducing the programme to businesses with a turnover below the £85,000 VAT threshold, and in April 2023 it will also apply to taxpayers who file income tax self-assessments for business or property income of more than £10,000 a year.

The committee is now calling on HMRC to “assess whether the administrative burden it is imposing on taxpayers is reasonable and affordable” before it continues with further national roll-out of the programme.