Have you ever wondered to yourself, ‘Why is HMRC Making Tax Digital?’ If so, we can now give you one answer: it’s going to raise more money for the taxman!
How do we know? Because the National Audit Office says so. Just over a week ago, on 29th October 2021, it published its report into HMRC’s 2020-21 accounts. You can download a copy here (the relevant section begins on page 302).
One of the key points in the report’s summary reads: ‘HMRC estimates that its Making Tax Digital programme will deliver additional tax revenue, though it will bring additional costs for taxpayers’.
Let’s take a look at how much more MTD is projected to raise – and how much extra it could cost you.
Making Tax Digital – the current state of play
If you need a quick refresher on Making Tax Digital, our simple Guide to MTD will get you up to speed. MTD is essentially about moving to a system of digital tax records and returns. By using approved software, the tax system will become paperless.
Currently MTD applies to VAT. Making Tax Digital for Income Tax will start in April 2024. MTD for Corporation Tax will begin no earlier than April 2026.
How much more will MTD raise for the taxman?
According to the NAO report, HMRC originally forecast MTD to generate an additional £920 million in tax revenue up to 2020-21. However, because only Making Tax Digital for VAT was properly operational, the taxman revised down that estimate to £480 million. HMRC now estimates that the programme actually generated £215 million by 2020-21. The figure was lower than expected because of the pressures of the COVID-19 pandemic and revised tax gap estimates.
However, HMRC now believes that MTD will raise an additional £2.9 billion to 2027-28.
How much more will MTD cost?
Making Tax Digital will cost both HMRC and taxpayers more, particularly as the scheme is rolled out.
HMRC has reported that the MTD programme between 2016 and 2020 cost £244 million. It also estimates the cost for 2020-21 at £113 million, with a further £528 million being spent between 2021 and 2026.
Taxpayers also face additional costs. These include investment in MTD compliant software, plus integrating digital record keeping into a business. HMRC estimates the costs as follows:
- For the approximately 1.1 million VAT taxpayers with a taxable turnover below the VAT threshold: a one-off transitional cost of £173 million and an administrative saving of £7 million annually
- For the approximately 4.2 million Income Tax Self Assessment businesses and landlords: a one-off transitional cost of £1,383 million and an administrative saving of £152 million annually
What do I need to do next?
To be fair, when answering the question ‘Why is HMRC Making Tax Digital’, you need to remember it’s not just about raising tax revenues. Digital record keeping and tax returns should make it easier to keep on top of your accounts and get your tax right.
At this stage, the most important thing you can do is get prepared. MTD for VAT will be mandatory for all VAT-registered businesses by 1st April 2022. MTD for Income Tax is coming in April 2024, and you may be able to sign up voluntarily now.
In order to be compliant, you will need to be using MTD approved software by the relevant dates. There are certainly benefits if you switch to cloud accounting software ahead of the relevant deadlines. If you’d like help in doing this, please get in touch with your THP account manager today.
About Jon Pryse-Jones
Since joining THP in 1978, Jon Pryse-Jones has been hands on with every area of the business. Now specialising in strategy, business planning, and marketing, Jon remains at the forefront of the growth and development at THP.
An ideas man, Jon enjoys getting the most out of all situations, “I act as a catalyst for creative people and encourage them to think outside the box,” he says, “and I’m not afraid of being confrontational. It often leads to a better result for THP and its clients.”
Jon’s appreciation for THP extends to his fellow team members and the board. “They really know how to run a successful business,” he says. He’s keen on IT and systems development as critical to success, and he continues to guide THP to be at the cutting edge and effective.