Three years after the final tranche of firms was switched to the digitised tax regime, the department has published a concluding evaluation considering the impact on tax revenue and businesses
HM Revenue and Customs’ final evaluation on the Making Tax Digital for VAT programme concludes that the initiative “successfully delivered against its objectives” across the board.
However, the detailed statistics contained in the assessment paint a more mixed picture, with a quarter of small businesses reporting that the costs of compliance have outweighed the benefits realised.
In 2019, the digital reporting regime became mandatory for all firms with annual revenue higher than the VAT registration threshold – which is currently £90,000. The programme was extended in 2022 to encompass all firms liable for VAT.
HMRC’s newly published “final evaluation”research report on the scheme’s effectiveness assesses the success of MTD for VAT in meeting three overarching objectives: tackling the tax gap; customer impacts; and wider economic benefits.
The department finds that the programme’s rollout has “generated additional VAT revenue as forecast”, with larger firms paying an extra £57 per quarter, on average, while smaller businesses are contributing an extra £19.
The evaluation also cites various “wider economic benefits” realised by taxpaying companies as a result of the digitisation initiative. Some 42% of firms have “seen some improvements in [at least] one of the wider operational or financial areas tested”, according to HMRC.
Common advantages cited by businesses include better business continuity, improved financial management, support for decision making, and increased openness to other digital tools.
Assessing the core intended impacts for users, the research found more than half of bigger companies on-boarded in 2019 “agreed they were more confident about getting their tax right, compared to one-fifth who disagreed”.
The report added: “Such gains were more modest for those mandated from 2022, with slightly more than a quarter (27%) citing improved confidence since adopting Making Tax Digital, though this rises to over a third (36%) when considering only fully functional software users.”
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Around two thirds of both the 2019 and 2022 intake of companies “reported at least one benefit from adopting Making Tax Digital and that those benefits improved over time”.
But the stats also show a significant minority of both cohorts that concluded that the costs of moving to the digital regime outweighed any benefits to their company.
Reports from public spending watchdogs have previously found that MTD has cost many small firms £500 or more, with the collective cost of the programme to UK plc as a whole running to more than £2bn.
HMRCS’s final evaluation outlines that 30% of firms above the VAT threshold claimed that the upside to them had been greater than the cost – but 14% “reported that the cost and effort outweighed the potential benefits for their business”.
For smaller firms, while 41% have experienced greater advantages than costs, 23% said that the opposite is true.
Nevertheless, the final section of the report states that “in conclusion, the evaluation found that Making Tax Digital for VAT had the expected impacts and so successfully delivered against its objectives”.
It adds: “[In] tackling the tax gap: More businesses keep their records digitally and update them more frequently. This reduced customer error and failure to take reasonable care, generating additional tax revenue, which was as forecast.
“[In] customer impacts: A majority of customers found it easy to sign-up to Making Tax Digital, easy to find compatible software and easy to make their first and subsequent submissions. Many reported the change increased their confidence their VAT was right. Most businesses incurred costs to comply with Making Tax Digital, but most also experienced at least one benefit too.
“[And in] wider economic benefits: Fully functional Making Tax Digital software had operational and financial benefits for many businesses and has acted as a spur to digitalisation for some. Businesses that adopted it saved time on ‘business finances and record keeping’ tasks on average.”
Having completed the rollout of digitisation across all VAT payments, HMRC last year opened a near-two-year testing programme for the expansion of the MTD initiative to include income tax self-assessment.
