HMRC's Making Tax Digital scheme also made tax more expensive – by £300M

Watchdog says transformation effort added costs instead of savings for most businesses

The UK tax authority's push to digitize services has backfired, saddling taxpayers with hundreds of millions in extra costs, according to a report by Parliament's public spending watchdog.

The Public Accounts Committee (PAC) found that Making Tax Digital (MTD), launched ten years ago, was imposed with little consultation and left businesses unaware of the administrative financial burden they'd face.

For example, after the rollout of MTD for VAT in 2022, His Majesty's Revenue & Customs (HMRC) estimated net additional costs to traders of around £300 million ($401 million) between fiscal 2020 to fiscal 2024.

Similarly, in February 2024, HMRC calculated that moving income tax self-assessment to MTD would impose more than £500 million ($668 million) in costs on taxpayers – exceeding annual savings by around £200 million ($267 million).

"There is no strong evidence to date to suggest productivity improvements or other benefits for most VAT traders following the introduction of MTD," the PAC report said.

In other tech tax developments, HMRC must wait for June's strategic spending review to determine how quickly it can retire its legacy systems – a project that has proven more complex and expensive than anticipated.

The PAC found that HMRC had allowed many of its IT systems for tax administration and customer interaction to become outdated, driving up its own costs and increasing the burden on taxpayers.

In total, HMRC's digital business group incurred £785 million ($1 billion) in costs during 2023-24, the most recent financial year reviewed by the Public Accounts Committee. It also spent £482 million ($644 million) on IT to develop new systems and services, and to remediate and modernize its legacy infrastructure.

The report noted that in 2020, HMRC identified its tax administration systems as a "significant risk to operations, due to the postponement of maintenance and system upgrades to secure cost savings."

Although the 2020 spending review allowed HMRC to invest more in addressing the issue, "progress in remediation is costing more and taking HMRC longer than expected, with some funding being reallocated to other priorities in 2023-24," the report found.

"HMRC considers the three key risks that arise from operating legacy systems to be lower levels of security, lower reliability and resilience, and higher costs of system changes," it said.

The tax collection authority told the PAC it was tracking progress and had plans to "remediate remaining legacy systems." However, the pace of progress will depend on how much funding the Treasury allocates in the five-year spending review covering 2026-27 to 2028-29, expected in June.

When the PAC asked why it was taking longer and costing more to move off legacy systems than expected, HMRC said some systems were more complex than anticipated, costs had been underestimated, and funding had been diverted to higher priorities.

"We asked HMRC whether it now understands what more it needs to do, what it will cost and when it expects remediation to be complete. HMRC said that it had a good understanding of what it needed to do and had a plan. But it was unable to say when it would complete remediation because funding for the three years after 2025-26 would not be known until it had its spending review settlement in June 2025," the report said.

The Register has previously reported on HMRC's struggles to move away from legacy systems. In December 2024, the agency awarded Accenture a £35.2 million ($47 million) contract without competition, citing "the technical risk, age and intricate interdependencies of the [National Insurance and PAYE System]," which meant "the support services could currently only be provided by Accenture."

The PAC questioned HMRC about increasing digital interactions with taxpayers as a cost-cutting measure. HMRC estimated that around 69 percent of all customer interactions in 2023-24 were digital.

"HMRC also told us that about two thirds of the calls it receives are avoidable, as the customer could have carried out the transaction, or found out the information, by using digital services. HMRC said if it could divert or deflect that contact away to digital channels it could reduce its costs," the report said.

However, efforts to cut costs by shifting to digital channels have instead increased the burden on taxpayers.

PAC chair Geoffrey Clifton-Brown said: "It is time for HMRC to prioritize modernizing its own systems so that it is fit to enter the second quarter of the 21st century. The potential for new technologies such as AI to augment HMRC's efforts to tackle these issues is clear, and HMRC must move at pace to seize the opportunities it presents.

"It is truly frustrating to see how much of its business the tax authority still does by post. Customers at the moment are forced to engage with an authority that is frankly a lumbering dinosaur. HMRC's attempts to transform its services through Making Tax Digital, while generating extra revenue, have also imposed hundreds of millions in extra costs on the taxpayer, with more set to come. The report makes clear that it will cost self-assessment taxpayers £200 million more than they save, and this is completely intolerable." ®