Making Tax Difficult: HMRC losing sight of customer in tax changes, PAC report warns

- HMRC not open enough about substantial costs imposed on many taxpayers by digital transformation programme

- Failures in HMRC planning, design, delivery of Making Tax Digital lead to costs and delays

HMRC has lost sight of needing to put customers at the heart of changes to the tax system. In a report published today, the Public Accounts Committee (PAC) warns that with the Making Tax Digital (MTD) programme, aiming to make it easier for people to get their tax right, HMRC is increasing the burdens imposed on some taxpayers. The report also finds that, in seeking further investment in MTD, HMRC has not been open enough about the substantial costs that will be imposed on many taxpayers.

The report finds that the design of MTD has not taken sufficient account of the realities facing business taxpayers and agents. While MTD will substantially benefit HMRC by improving its systems, taxpayers will be asked to spend more and do more to comply. Burdens will be increased with Self Assessment taxpayers asked to pay for third party software and file tax returns quarterly. Many stakeholders, including tax experts and software developers, report that up until 2023 HMRC had ignored their advice on MTD.

The report finds that HMRC excluded a total of over £2bn in upfront transitional costs for customers from its 2022 and ’23 business cases for MTD. Business taxpayers could have to pay more than £1.9bn to comply with new arrangements over the first five years, and HMRC has not said how many and which customers will face the highest transitional costs. The PAC is concerned about how much MTD could cost customers, and calls for full transparency on costs and benefits to the public purse and customers in future.

Unacceptably, with £640m of taxpayer’s money spent on MTD as a whole, many questions remain about how it will work for Self Assessment. HMRC has yet to figure out how to make MTD work for important elements such as how the system will support taxpayers with multiple agents, and how it will work for people who share ownership of property.

Widespread and repeated failures in HMRC’s planning, design and delivery of MTD have led to increased costs and several delays to the programme. HMRC expects introducing MTD for VAT and Self Assessment will now cost £1.3bn, a 400% increase in real terms compared to its original estimate of £222 million in 2016 for all three taxes in the programme. HMRC’s poor track record of repeated delays to MTD, and its lack of conviction in its latest timetable, gives the PAC little confidence that it will deliver the rest of MTD on time.

Dame Meg Hillier MP, Chair of the Public Accounts Committee, said: “When reporting on proposals for digitalising the tax system, our Committee should not have to be recommending that HMRC start with what taxpayers need – in an ideal world, one would hope this would simply go without saying. But seven years and £640 million into the Making Tax Digital programme, we are concerned HMRC is also 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. We are also concerned at the substantial costs to be imposed on many taxpayers. HMRC’s exclusion of billions of pounds of projected costs when seeking investment for the programme is utterly extraordinary, and future transparency on costs and benefits must be non-negotiable.”

PAC report conclusions and recommendations 

Widespread and repeated failures in HMRC’s planning, design and delivery of Making Tax Digital have led to increased costs and several delays to the Making Tax Digital programme.In December 2022, HMRC delayed the timetable for Self Assessment for the fourth time, making its introduction eight years later than originally planned. HMRC’s planning for Making Tax Digital for Self Assessment has been too high level. HMRC accepts that it has repeatedly underestimated the scale of the task to fully rollout the programme for VAT and Self Assessment, including misjudging how complex it is to move taxpayer records to a new system and fully test the design of the programme. The Self Assessment part of the programme was always going to be a more complicated task than for VAT. Despite this HMRC announced a fast timetable without anticipating the additional complexity and its subsequent work to design and test the system has been far too limited. Its pilot test had just 137 participants by 2023, falling far short of HMRC’s aim to pilot the programme with 15,500 people. The repeated delays to Making Tax Digital have delayed the benefits and increased costs hugely. HMRC expects introducing Making Tax Digital for VAT and Self Assessment will now cost a total of £1.3 billion, a 400% increase in real terms compared to its original estimate of £222 million in 2016 for all three taxes in the programme. The delays to introducing Making Tax Digital for Self Assessment taxpayers with lower incomes will mean the Exchequer will likely miss out on additional tax revenue of £1.75 billion. HMRC has still not said when it will deliver Making Tax Digital for Corporation Tax or how much this will cost.

Recommendation 1A: HMRC should urgently test that its existing plans are sufficiently detailed and rigorous to ensure the successful delivery of the remainder of the programme, and report to the Committee on its findings for Making Tax Digital for Self Assessment as part of its Treasury Minute.

Recommendation 1B: HMRC should, as part of its Treasury Minute response, specify in detail how it will hold senior leaders accountable for delivering against the programme’s timetable and budget, and what consequence there will be for any further timetable and budget overruns.

It is unacceptable that seven years in, with £640 million of taxpayer’s money spent on the programme as a whole, so many questions remain about how Making Tax Digital for Self Assessment will work. HMRC originally intended to introduce Making Tax Digital for Self Assessment from 2018. But after just 18 months, it announced in July 2017 that it would delay the introduction of any changes to Self Assessment until at least April 2020. HMRC now does not expect to be able to deliver the first phase until at least 2026. Seven years in, HMRC is still in the development stages of its plans for Self Assessment. It has yet to figure out how to make the programme work for important elements, such as how the system will support taxpayers with multiple agents, how the system will work for people who share ownership of property. HMRC expects that requiring customers to submit tax records quarterly as well as annually will encourage taxpayers to improve the accuracy of their record keeping. Stakeholders, however, are concerned about aspects of the design, including the need for quarterly digital reporting, and how far this will help businesses in forecasting tax liabilities, particularly those with seasonal trading patterns.  

Recommendation 2A: HMRC should, in partnership with its programme stakeholders including customers, tax agents and software providers, resolve design issues and write to the Committee by April 2024 to explain how each of the significant outstanding design issues have been resolved. As part of this, HMRC should consider what steps it can take to simplify arrangements for Self Assessment taxpayers.

Recommendation 2B: HMRC should, by Summer 2024, undertake and publish a robust assessment of how much difference to tax revenue is made by (i) more frequent submissions of Self Assessment data and (ii) by digital submissions.

HMRC’s design of Making Tax Digital has not taken sufficient account of the realities facing business taxpayers and agents. HMRC’s key aim for the programme is to make it easier for taxpayers to get their tax right and help reduce the amount of tax lost due to errors. While Making Tax Digital will substantially benefit HMRC by improving its systems, taxpayers will be asked to spend more and do more to comply. 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. Many stakeholders, including tax experts and software developers, report that up until 2023 HMRC had ignored their advice, including on what the programme needs to do to work for taxpayers. HMRC has increased its engagement with these stakeholders, but this only started in early 2023. Some stakeholders remain concerned about the engagement from HMRC on the design of the Self Assessment system and the impact on customers.

Recommendation 3A: In addition to Making Tax Digital, HMRC should research what services customers would find most helpful, drawing on customer views as well as international research, and publish its findings by Autumn 2024.

Recommendation 3B: HMRC should ensure that all its future proposals for digitalising the tax system: start with what taxpayers need; are demonstrably better for them than existing arrangements; and the plans are supported and therefore can be championed by taxpayer representatives, including its own Administrative Burdens Advisory Board.

In seeking further investment in the programme, HMRC has not been open enough about the substantial costs that Making Tax Digital will impose on many taxpayers. In 2021, HMRC published research that showed customers will incur both upfront transitional costs and ongoing costs when Making Tax Digital for Self Assessment is introduced. It expects complying with the programme to cost taxpayers on average £330 upfront, with some facing costs close to £1,000. However, HMRC excluded £1.5 billion in upfront transitional costs for customers in its cost-benefit analysis in its business case seeking further investment for the programme in May 2022. It also excluded upfront transitional costs of £640 million in its 2023 business case which was also seeking further funding. Its latest figures indicate business taxpayers could have to pay a total of more than £1.9 billion to comply with the new arrangements over the first five years, including £1.2 billion if the programme is extended to self-employed businesses and landlords with incomes between £10,000 and £30,000. HMRC has not said how many customers will face the highest transitional costs and how this varies for each income bracket. We are concerned about how much Making Tax Digital could cost customers. It is essential that HMRC is fully transparent in future about both the costs and benefits of the programme to both the public purse and to customers.

Recommendation 4: Before finalising its proposals to extend Making Tax Digital to lower income taxpayers, HMRC should:

• fully reassess the costs for customers to comply with Making Tax Digital for Self Assessment, taking account for inflation and any significant design changes made when finalising its plans; and
• use this to prepare a robust updated business case for Making Tax Digital for Self Assessment.

HMRC’s poor track record of repeated delays to the Making Tax Digital programme and its lack of conviction in its latest timetable gives us little confidence that it will deliver the rest of the programme on time. HMRC’s original delivery timetable for the programme was not realistic and did not reflect the scale of work required. There remains significant uncertainty about whether HMRC can deliver the remainder of the Making Tax Digital programme on time. The programme has experienced multiple issues that HMRC did not foresee, and further risks could emerge as the programme progresses. HMRC’s current plan for the introduction of Making Tax Digital for Self Assessment shows it needs to deliver many elements in parallel, such as raising awareness, pilot development and testing, and staff training. There is a lack of confidence in the programme among stakeholders. With major uncertainty remaining over its design choices, HMRC will have less time to work through and test the technical solutions, such as how data security will be achieved for taxpayers with multiple agents or how a free service will work for those with the simplest affairs. HMRC asserts that its new timetable allows for unanticipated design issues and policy announcements, but it would not rule out further delays to the programme due to unforeseen circumstances. HMRC has set itself a target of April 2025 to be ready for a near-unrestricted voluntary pilot of 1.6 million Self Assessment taxpayers with incomes over £30,000, leaving it less than two years to be ready. HMRC has yet to decide how it will communicate the changes required in Self Assessment to its customers.

Recommendation 5A: HMRC should, as part of its Treasury Minute response, explain how it will assure itself that the timetable and budget for Making Tax Digital for Self Assessment is realistic and how it will use independent technical assurance and other sources of evidence to provide this assurance.

Recommendation 5B: If further changes to the delivery timetable are necessary, HMRC should communicate this clearly, early and definitively, to provide certainty to its delivery partners and customers.

We are concerned that the repeated delays and poor design of the Self Assessment phase of the programme is deterring software providers from developing quality products and will ultimately put customers at risk. Over 500 software products are available for Making Tax Digital for VAT, which can make it difficult for customers to make an informed choice about what to use. It also makes it hard for HMRC to conduct timely reviews of the quality of products and legitimacy of the providers. Stakeholders report that some software available has unexplained features that can lead to incorrect reporting. Customers can feel overwhelmed, and stakeholders have raised concerns about the security and safety of the products on offer, as well as some unexplained features and hidden costs. HMRC expects the number of software products for VAT to reduce but could not tell us whether it plans to introduce further quality measures to ensure software meets its accreditation standards. Delays and uncertainty to the Self Assessment rollout have likely played a role in software providers becoming increasingly hesitant to continue their investments into developing products for the programme. This has led to some providers pulling products from the market or reducing their investment in developing products for Self Assessment. We are concerned that these delays and attrition amongst software providers could result in higher prices or lower the quality of product on offer to taxpayers. HMRC’s lack of proper accreditation checks leaves us concerned about where responsibility and liability fall in the event of software or cyber security failures. HMRC did not say who would be liable if something went wrong but does not expect to penalise customers if there was an error in their tax submissions because of a software issue. 

Recommendation 6A: HMRC should, within three months, write to the Committee and set out how it will ensure that it strikes the right balance between ensuring competition, quality and access to software for its Making Tax Digital VAT and Self Assessment customers.

Recommendation 6B: HMRC should, within three months, write to the Committee explaining what assurance customers can take from its accreditation of software and how it will protect taxpayers if the software (rather than the taxpayer) makes mistakes in tax submissions or does not safeguard taxpayer data sufficiently