HMRC have published a policy paper, 'Customer costs and benefits for the next phases of Making Tax Digital'. The paper assesses the costs involved with the next phases of transitioning across to Making Tax Digital (MTD) for both VAT and Self Assessment as well as ongoing annual costs.

Making Tax Digital (MTD) is currently a requirement for VAT registered businesses trading above the VAT threshold and new registrations. From April 2022 all VAT registered businesses move into MTD for VAT.

MTD will be extended to Income Tax Self Assessment, for businesses and landlords with a turnover of £10,000 or more, from April 2024. This will be further extended to cover general partnerships from April 2025.

The introduction of MTD ITSA has been Delayed by a year, as announced by the government, in recognition of the time and costs involved in transitioning to the new system. Feedback received by HMRC from stakeholders, businesses operating MTD for VAT and the software industry have meant that the cost projections for customers moving to MTD have increased from previous estimates.

The policy paper summarises the estimated customer costs as set out in the related Tax Information and Impact Note (TIIN). 

  • It is estimated that the transitional cost to businesses of moving to MTD will be approximately £1.383 million. This is an average cost of £330 per business.
  • It is estimated that the ongoing costs of tax compliance inside MTD will increase by £152 million. This is an average annual cost per business of £35.
  • Transitional costs are those incurred by the business preparing for or becoming accustomed to MTD. These additional costs should be tax-deductible. At a practical level this will include:
    • New or upgraded hardware.
    • Accountancy costs.
    • Time spent familiarising the business with the system.
    • In-house training.
  • The ease of transition will depend on the current levels of digitalisation of the business and whether the business is already using MTD for VAT.
  • Continuing costs will be incurred undertaking tax compliance as part of MTD. They will be in addition to the usual costs of tax compliance but will remain stable each year. Example costs include:
    • Software subscriptions.
    • Bridging software.
    • Additional time incurred by quarterly reporting.

HMRC has used a number of assumptions to calculate these costs, which may or may not stand up to detailed scrutiny. Key assumptions include:

  • Some MTD software can be operated on a smartphone. Few businesses will need new hardware, but a basic laptop is costed at £200 for an MTD ITSA-only business and £167 for MTD for VAT businesses.
  • A quarterly update will take two minutes of taxpayer time at an estimated cost of £3 for MTD ITSA. No account has been taken of time incurred checking the data, which should be part of the usual business compliance checks.
  • If using an agent to check the MTD ITSA update, it is estimated that this will incur only six minutes of the agent's time at a cost to the taxpayer of £24 per annum. This only reflects the cost of communicating quarterly with the agent as there should be no increased checking; only a change to the point in the year when the checks are carried out.
  • There should be no additional time or costs incurred for quarterly updates for MTD VAT as VAT returns are filed quarterly anyway.

HMRC notes that the benefits of MTD are harder to quantify and may outweigh these costs. Over 1.5 million businesses have already transitioned to MTD for VAT. Their feedback and those obtained from independent research, has shown a number of positive impacts of MTD, including:

  • Time saved/ increased productivity.
  • Reduction in input errors.
  • Stress reduction.
  • Improved customer experience.
  • Increased confidence in managing their tax affairs.

Useful guides on this topic

Making Tax Digital: Index and timeline:
When does Making Tax Digital (MTD) apply? What does Making Tax Digital really mean? How will it affect you? Does MTD mean quarterly reporting? Is my business exempted from Making Tax Digital?

Making Tax Digital: Survival guide (for the self-employed and landlords)
This is a freeview 'at a glance' guide for the many self-employed taxpayers, company owners and property landlords who are unaware of HM Revenue and Custom's radical plans to transform the tax online filing system. 

Making Tax Digital: Pricing for Accountants
How much can you charge? How much should you charge?

Making Tax Digital: VAT
What is Making Tax Digital (MTD) for VAT? What is VAT 'functional compatible' software? What do you need to report their VAT? Are there penalties for making mistakes? 

External links

Policy Paper: Customer costs and benefits for the next phases of Making Tax Digital

TIIN: Extension of Making Tax Digital for Income Tax Self-Assessment to Businesses and Landlords

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