Making Tax Digital generated £215m less than expected
HMRC’s Making Tax Digital (MTD) programme is expected to generate £265m of additional revenue this year which is 45% lower than the original forecast of £470m
A report by the National Audit Office (NAO) stated that the additional revenue from Making Tax Digital for 2020-21 was 45% lower than originally expected. However, the NAO expect that by 2027-28 Making Tax Digital should raise an additional £2.9bn for the tax authority.
Against this, the costs of the programme between 2016-20 totalled £244m with a further £528m expected to be raised for 2021-26. However, the NAO expected that the taxpayer will face a one-off transitional cost of around £1.5bn as a result of the forthcoming extension of the Making Tax Digital programme.
The extra cost will cover the cost of the new software.
The new forecast has been published in the National Audit Office’s most recent report that takes into account HMRC’s 2020-21 accounts.
Making Tax Digital was announced in 2015 and involves most individuals and businesses transferring to a solely digital tax account. Making Tax Digital for VAT has already been launched and as of April 2021, all businesses with a taxable turnover of over £85,000 are required to send VAT returns to HMRC using a making tax digital compatible software. As of April 2022, all businesses will be required to do so.
It was announced by HMRC in September that Making Tax Digital for Income Tax had been delayed and is now scheduled for 2024.
Gareth Davies, the comptroller and auditor general of the NAO said: ‘The Covid-19 pandemic has significantly reduced tax revenues and made it more difficult for HMRC to take enforcement action. Now that the initial impact of the pandemic has eased, normal tax compliance levels should be restored including Making Tax Digital.’
The report also covered HMRC’s IT service which stated that the tax authority had struggled to comply with the UK General Data Protection Regulation and associated security obligations due to the age and extent of its IT systems.
According to the report, the tax authority had its transformation ability affected by multiple factors across the last two years, which has meant that it has needed to adjust and ‘reprioritise’ its previous plans for transformation.
These include the transition away from the European Union, as well as higher-than-expected customer demand prompted by the government’s response to the Covid-19 pandemic crisis, such as support payments and the coronavirus job retention scheme (CJRS).
The NAO report states that these developments are ‘likely to impose additional challenges to HMRC’s 10-year modernisation plans.’
HMRC’s strategy currently aims to make it ‘easier to get tax right’ and provide a better experience for taxpayers and businesses. The tax authority also wants to work on reducing the tax gap and increasing the benefits for businesses to ensure greater resilience and responsiveness in times of crisis.
Citing previous concerns from the Public Accounts Committee (PAC) about HMRC’s access to resources to match its long-term responsibilities, needs and ambitions, the NAO stressed the PAC had recommended the tax authority ‘review its strategy to ensure it had the means to carry out its workload in an effective manner’.
It was announced in the Autumn Budget that HMRC has been allocated £2.3bn in order to improve its border systems across the SR21 period, through £838m over the three years to 2024-25 to complete the delivery of critical IT systems, including the new Customs Declaration Service (CDS).
It also includes £107m in 2022 for the Trader Support Service (TSS), which helps traders to move goods into Northern Ireland.
The NAO also highlighted that HMRC had significant levels of technical debt in 2019-20 which makes the department more vulnerable to cyber and security threats. The tax department reported that, in 2020-21, the age and extent of its legacy IT presented challenges for its compliance with the UK General Data Protection Regulation (GDPR) and associated data security obligations.
In March 2021, HMRC stated that it was taking certain measures to address this issue, this included addressing high-priority technical debt and moving systems over to the cloud. The tax authority also stated that it was rationalising the IT estate.
The department also decommissioned more than three-quarters of the 166 IT services considered to be ‘obsolete’.
According to the NAO report, HMRC is working with the Information Commissioner’s Office (ICO) to consider the implications of a 2020 review, commissioned by HMRC, into its legacy technical infrastructure, and actions to tackle the issues arising from that review.
A HMRC spokesperson said: ‘We run a huge 24/7 operation that requires one of the largest and most complex IT estates in the UK. Updating our technology is a continual process – we’ve worked hard over recent years to address issues associated with older IT systems on our estate and have robust plans to continue this work.
‘Making Tax Digital remains fundamental to achieving our goal of building a trusted modern tax system.
‘The revised MTD for ITSA timetable announced in September provides more time for those required to join to make the necessary preparations and gives HMRC an extra year to pilot the end-to-end service. We are working closely with businesses, agents and software suppliers to ensure we get this right.’
Report by the Comptroller and Auditor General: HMRC 2020-21 Accounts
Links to commentary, legislation and other resources on Making Tax Digital can be accessed via the Quick Link.
See In-Depth: 180-005 Making tax digital: overview and timeframe for more detailed analysis.
See also Hardman’s Key Data: 2-005 Digital reporting and record-keeping (Making Tax Digital).
Digital Services are covered in the HMRC Self Assessment Manual: SAM50530.
Story by Ruby Flanagan from Accountancy Daily