Source · Select Committees · Public Accounts Committee
Recommendation 9
9
Rejected
Making Tax Digital aimed to reduce tax gap by easing burdens for small businesses.
Conclusion
We asked HMRC to explain what Making Tax Digital was expected to deliver for the taxpayer, Exchequer and HMRC when the programme was launched in 2015. It said that Making Tax Digital aimed to make it easier for small businesses and landlords to get their tax right by requiring them to keep good records using software. HMRC told us that small businesses accounted for about 48% of the tax gap, which was £15.6 billion overall in 2020–21. It further explained that about £9 billion of the tax gap was down to simple errors and failure to take reasonable care and that was what Making Tax Digital was aiming to address. Making Tax Digital was originally approved with the expectation it would reduce the burdens on customers because digital record keeping would make tax submissions easier.22
Government Response Summary
The government rejects the committee's observation, stating that it's not possible to robustly disaggregate the effects of MTD components, and presents evidence from MTD for VAT and OBR-certified MTD for ITSA benefits showing significant tax revenue reduction from error and failure to take reasonable care, expecting £780 million by 2028-29.
Government Response
Rejected
HM Government
Rejected
2.6 The government disagrees with the Committee’s recommendation. 2.7 MTD software is designed to ensure records are kept accurately and in a timely manner. It is not possible to estimate robustly the effects of the separate components in isolation, since quarterly digital updates help to ensure software is used timeously. While initial assumptions were made, these have been overtaken by evidence from MTD for VAT which does not allow for disaggregation of the source of the additional tax revenue. 2.8 A 2022 evaluation estimated additional tax revenue from MTD for VAT in 2019-20 of at least £185 million, providing strong evidence that MTD reduces the tax gap. This provides confidence that the approach will also yield benefits in ITSA. 2.9 HMRC has now applied the MTD for VAT evaluation findings to MTD for ITSA and expects a reduction of around 15% in the tax gap from error and failure to take reasonable care. This methodology has been approved by the independent Office for Budget Responsibility (OBR). 2.10 Based on the Autumn Statement 2023 forecast, OBR-certified MTD for ITSA benefits (including digital prompts) are: • £25 million in 2025-26; • £120 million in 2026-27; • £465 million in 2027-28; • £780 million in 2028-29. 2.11 These estimates assume quarterly updates and software together encourage higher-quality and timely record keeping. HMRC will evaluate benefits of MTD for ITSA as new evidence is available. 2.12 Research with customers shows around one-third currently wait to the year end to update records, indicating that MTD would increase the frequency of record keeping. Evidence of behaviour and estimates will improve as MTD for ITSA is implemented.