Public Accounts Committee hearing: Omitted costs did not affect MTD decisions, say HMRC chiefs

They were speaking at a Public Accounts Committee oral evidence session after a scathing report from the National Audit Office revealed the excluded costs to taxpayers and also said the programme was now expected to cost the government five times the original forecast, in real terms, up from £226 million in 2016 to £1.3 billion today.

The HMRC representatives at the session on 19 June were:

• Jim Harra, First Permanent Secretary and HMRC’s Chief Executive
• Jonathan Athow, HMRC’s Director General of Customer Strategy and Tax Design
• Jo Rowland, HMRC’s Director General of Transformation

Confronted on the figure left out of the 2022 business case, which only estimated costs to taxpayers of around £900 million over five years, Rowland said this was a result of a “technical interpretation error”, in which the figures and forecasts in the business case were made using the “financial case” method used by HMRC to evaluate policies, rather than the “economic case” mandated by the Treasury’s Green Book guidance on how to appraise policies, programmes and projects. She said “one of the main drivers” of MTD is the additional tax revenue, which is not recognised by the economic case, but that the now-corrected figures still show a “very healthy return”.

Harra added that despite the excluded figures, he is “very confident” that the same decisions would have been made had the additional costs been included. He said: “We have throughout estimated customer costs. The decisions that have been made… have been motivated by concern about managing customer cost and customer burden.”

MTD delays and pilots

On the wider delays that have beset the project, committee chair Dame Meg Hillier (Lab) asked if HMRC had an “unrealistic understanding” of the impact MTD would have on existing systems. Harra admitted that HMRC had “underestimated the scale and complexity of the challenge”, while it was also affected by other events which “intervened” and “distracted” from implementing the scheme.

He said the concept was good but not enough investigation was done on “what was needed”, such as the time it would take to migrate data from computer systems. Harra said that there was also “no contingency” for new tax policy which would affect MTD. Rowland added that the two-year delay to the scheme, as well as the decision to stagger the cohorts brought in to MTD, was a response to the tight timelines HMRC gave itself.

She said: “I’m confident that all the lessons learned from VAT have now been accommodated in to the new roadmap. Obviously, we’ve had some big unforeseen risks in the delivery of this programme to date and there could be some big unforeseen risks in the delivery (in the future).”

Hillier also questioned the lack of piloting, including the use of smaller and more specific environmental taxes to test the approach, which would always be easier to administrate than the more complex income tax. Rowland said while there was “no precedent” for MTD, pilots often begin with smaller numbers of test participants but there would be a “near-unrestricted” pilot opened to the public in 2025.

Alternatives to MTD

Sarah Olney (Lib Dem) questioned whether other approaches such as greater investment in compliance officers would be more effective than MTD. Harra said MTD is designed to address the smaller errors in returns from small businesses, which account for around £9 billion a year. He said he was confident MTD would address the tax gap but that it was not designed to address deliberate evasion, with HMRC spending around £550 million a year investigating and correcting small errors. Athow added that many of these small errors result in missed payments of less than £1,000, so it is likely compliance investigations would cost HMRC more.

Harra said the success of MTD for VAT shows “it works”, with both quantitative and qualitative research supporting it, adding: “If we don’t do Making Tax Digital there are no other serious options… that would address the small business tax gap.”

Jonathan Djanogly (Con) asked how HMRC was learning from other countries’ tax authorities on digital services, with Harra replying that it is ahead of some and behind others, but that it knows it must “speed it up” to keep up with other countries. Jonathan Athow added that while HMRC looks at the approach of other countries, tax systems around the world are very different. Rowland said HMRC was already a “digital organisation in many ways”, through features such as the web services and mobile app.

Djanogly also read from a confidential letter which listed a “huge number of problems” with the administration of MTD.

Asked by Olney why the new system would require taxpayers to make up to seven submissions a year rather than one, Athow said the aim is for record-keeping to move to “near real time” and automated systems may then be able to submit these records to HMRC “in the background”.

Software and AI

Athow admitted that the delays to the scheme had affected confidence among software developers but HMRC was looking to “build certainty”, while it was also working on systems which could accommodate taxpayers using “double agents”, such as both bookkeepers and accountants. Rowland said some developers had been shown parts of the MTD roadmap as HMRC looks to be “more transparent”, with Harra adding that should there be issues with a software system which HMRC should have recognised while accrediting it, then taxpayers would not be penalised for the resulting errors.

Questioned by Sir Geoffrey Clifton-Brown (Con) on how the rise of artificial intelligence could improve MTD, Rowland said she was aware of possibilities but for now there were no plans to replace any additional staff with AI systems.

Rowland added that as different cohorts of taxpayers are brought on to the scheme, they will have the option to join earlier than is mandated. She said that for those whose income changes to the extent that they would no longer be part of a mandated cohort, taxpayers will be encouraged to stay on MTD for an initial three years before being given the option to “opt out”.

Harra added that while there may be reluctance from some taxpayers to sign up to MTD, tax is a “chore that you do have to do” and he was hopeful the scheme would overall make things easier.

Listen to the full session.