HMRC may have hoped the December 2022 announcement that making tax digital income tax self assessment (MTD ITSA) is to be delayed might settle the debate on the policy (other than how it might be adapted to suit smaller self-employed businesses and landlords). That is clearly not going to happen.

When the December 2022 announcement was made, the NAO had already started an investigation concerning progress made and whether the programme will deliver value for money. ICAEW contributed evidence to that investigation. 

The NAO has now published its report. The key findings include:

• HMRC’s vision to digitalise the tax system has the potential to bring about a step-change in the system’s efficiency and effectiveness.
• HMRC’s initial timeframe for MTD was unrealistic. It did not allow sufficient time for HMRC to explore the full range of options that would achieve the programme’s aims and select one that it could implement.
• MTD ITSA is at least eight years behind the original timetable and HMRC has not resolved some important elements of its design.
• The repeated delays and rephasing of MTD have undermined its credibility and increased its costs. There is a risk that delivery partners and taxpayers disengage from a programme that can only succeed if those groups significantly change their behaviour.
• HMRC has not demonstrated that the programme offers the best value for money for digitalising the tax system, with later business cases significantly underplaying the total cost to customers of making the change. HMRC still expects the programme to generate a positive return.
• HMRC will need to keep running most legacy systems alongside its modern tax management platform. This is a critical aspect of HMRC’s digital transformation that gets insufficient attention.

The PAC has announced an inquiry based on the NAO report. The inquiry will consider:

• HMRC’s original vision and plans;
• progress made before re-phasing the programme at the end of 2022;
• the realism of HMRC’s latest plans for the programme.

ICAEW has submitted written evidence to the committee (see ICAEW REP 054/23) and has offered to provide oral evidence. HMRC is to provide oral evidence to the committee on 19 June 2023.

ICAEW’s evidence is largely based on the letter it sent to HMRC in April 2023, calling for fresh thinking on MTD ITSA. ICAEW has recently received a reply to that letter. The reply reconfirms the arguments in favour of quarterly updates, arguments that ICAEW continues to find unconvincing. It noted that HMRC does not wish to prejudge the outcome of the review or wider work on the design of MTD.

Since ICAEW wrote in April, it has become even more concerned about HMRC’s capacity to deliver the support that taxpayers and agents will need to implement MTD ITSA given HMRC’s current service performance and the likely continued downward pressure on HMRC’s budget and headcount. ICAEW is also very concerned about the software market given the impact that delay and continuing uncertainly have on developers’ investment cases.