Making Tax Digital increases costs for businesses

Making Tax Digital is not reducing errors and is proving to be much more expensive to implement than HMRC originally claimed, according to a joint user survey by CIOT and ATT

HMRC’s flagship digitisation programme is adding significantly to costs and overheads for the VAT-registered businesses that have switched to online reporting.

An online poll of 1,091 businesses and agents held during December and January canvassed opinions about the implementation of Making Tax Digital for VAT, which has been mandatory for most VAT-registered businesses since April 2019, and the future of the whole Making Tax Digital programme.

Nearly 90% of respondents said digital working had not reduced errors. More than 70% of respondents said Making Tax Digital for VAT has had little impact on errors made by their clients, and the majority of remaining responses reported an increase in errors rather than a reduction.

While the average transition cost was estimated by HMRC to be £109 per VAT–registered business, less than 10% of respondents said this was the case for them or their clients.

In contrast, almost half (45%) put costs at between £109 and £500, and 12% estimated costs to be over £5,000.

Just 8% of respondents estimated ongoing compliance costs at or below the government’s estimate of £43 a year.

Half (54%) of respondents estimated costs at between £43 and £500, and 20% reckoned the costs to be between £500 and £1,000.

Those working in-house for larger businesses reported the highest costs, with 46% reporting transition costs above £5,000 and 29% reporting ongoing costs over that amount.

Over half (56%) of agents reported that more three-quarters of their clients required help with the move to digital record keeping, and 36% and 48% respectively repored that over three-quarters of their clients needed ongoing help with keeping digital records and filing their VAT returns.

This has been expensive for agents, who have borne significant costs in helping their clients become compliant.

More than 70% reported unrecoverable time and costs of over £100 for each client within the scope of Making Tax Digital for VAT. This percentage reduced slightly to 44%, when looking at similar costs on an ongoing basis.

Just 14% of respondents stated there had been an increase in productivity in their own organisation as a result of Making Tax Digital for VAT, reducing to 13% for their clients.

A total of 55% considered there had been a decrease in productivity in their organisation, and 51% for their clients.

Tina Riches, chair of the joint CIOT and ATT digitalisation and agent services committee, said: ‘These initial results underline our concerns that, far from bringing benefits to businesses and the Exchequer, MTD for VAT has so far created additional, costly obligations for most businesses beyond what was predicted by HMRC.

‘Appropriate software can, when used properly and in accordance with a business’s needs, deliver significant benefits. But our survey demonstrates that MTD is not currently delivering those benefits to businesses, nor likely to reduce the tax gap. A thorough review and further consultation is needed before extending its scope.’

The government has yet to outline plans for extending the scope of Making Tax Digital. Half (49%) of those polled thought that the next step should be to extend Making Tax Digital for VAT to voluntarily VAT-registered businesses, with 40% suggesting an extension to corporation tax for businesses who are already in the scope of Making Tax Digital for VAT.

Further rollout

The majority (74%) thought that income tax for non-VAT registered individuals was the last area that should be brought into Making Tax Digital. April 2025 was also the most popular date from which any further compulsory extension should take effect, and a minimum two-year pilot was preferred.

Riches said: ‘As we anticipated, the roll out of MTD for VAT has proven more difficult than the government expected.

‘MTD for income tax would encompass a significantly greater number of taxpayers, many of whom will be less digitally capable than VAT registered businesses, and would be much more complex.

‘Taxpayers will require significant training and ongoing support, and we are concerned that their agents, the tax charities and HMRC, simply will not be able to cope.’

 

5
Average: 5 (4 votes)
Subscribe