HMRC’s Making Tax Digital scheme will end up costing businesses far more than it saves them.
The digital tax system – which aims to modernise tax returns for businesses and make it easier for them to get their tax right – will come into force from next April. It will require most VAT-registered companies to keep digital records for VAT and submit their returns digitally.
The government originally said the scheme would save businesses £100 million a year from 2021. But in its latest report, HMRC has admitted that businesses could end up losing out instead– and in a big way.
“HMRC has published revised forecasts reflecting the impact of the government’s decision to change the scope and pace of the roll out,” it said in its Annual Report and Accounts. “HMRC now forecasts that there will be lower transition costs, but that ongoing costs will outweigh ongoing savings for businesses by £37 million a year in the long term.”
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The government’s initial plan was to include all businesses in its digital tax scheme. But now, only businesses which have a turnover of more than £85,000 will need to file returns digitally. It has also extended the timetable for getting the scheme underway.
“We’ve already said we’re slowing the pace at which businesses need to keep digital records and send information to us through Making Tax Digital, to make the transition as smooth as possible,” Jon Thompson, chief executive and permanent secretary, said.
Because it has made the decision to raise the threshold, and slow the launch, HMRC expects Making Tax Digital to generate £440 million less in additional tax revenue by 2020-21 than first predicted. Although it has said it still expects to generate £1 billion of additional tax revenue by 2023.
An HMRC spokesperson said it had been open with MPs about the impact of changes to Making Tax Digital. “Our ambition to become one of the world’s most digitally-advanced tax authorities remains unchanged,” he explained. The spokesman said the costs incurred by businesses are likely to qualify for full tax relief. Although this is not reflected in the estimates.