The much vaunted digital overhaul of the tax system will end up costing businesses more than it saves them, HMRC has admitted.
The Making Tax Digital programme, the brainchild of former Chancellor George Osborne, was aimed at modernising tax returns.
From next April, most VAT-registered companies will have to keep digital records for VAT and submit their returns digitally.
Fortune: The new tax system will end up costing businesses more than it saves
Original forecasts said the scheme would save businesses £100 million a year from 2021. But HMRC’s latest view is there will be no cost savings and the extra work will end up costing firms £37 million a year.
‘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,’ its annual report reveals. The revised forecasts stem from changes made to the regime last year which include a slower rollout.
Initially, it was to include all businesses, but now only companies with turnover of more than £85,000 have to file returns digitally.
HMRC said most of the savings from the scheme would have been made by companies below this threshold that still operate paper-based accounting systems.
Due to the slower launch, HMRC also expects Making Tax Digital to generate £440 million less in additional tax revenue by 2020-21 than first predicted. But it claims the scheme will still generate £1 billion in additional revenue by 2023. In June, the British Chambers of Commerce called for the programme to be delayed until 2020 because the launch clashes with the date that Britain leaves the EU.
Richard Asquith, vice-president of global tax at Avalara, said: ‘We’re going to have these colliding events. From a VAT perspective, two of the biggest changes in 45 years are going to happen two days apart.
‘Brexit is this asteroid hurtling towards us. We don’t know how big it is and we don’t know what it’s going to look like.’
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 added.
The spokesman said the costs incurred by businesses are likely to qualify for full tax relief, which is not reflected in the estimates.