On 20 June 2023 the head of HMRC noted in a hearing before the Public Accounts Committee (PAC) in parliament that the complexity of Making Tax Digital (MTD) had been underestimated. As a result, there had been continual delays to MTD for income tax.

MTD for income tax is due to be introduced in April 2026 and will apply to sole traders and landlords with income above GBP 50,000. Previously the launch had been planned for April 2024.

The overall scale and complexity of the transition to MTD for HMRC, taxpayers and their agents was not fully understood at the time that MTD was announced. In particular the complexity of migrating data from existing systems and the need to maintain data quality involved more time than initially estimated.

Problems also arose from the need to authorise access to systems by agents of the taxpayers and to determine the extent of that access. SMEs may use an in-house bookkeeper, or an external accountant or tax agent for their annual accounts. The various people involved in the tax reporting need to be given access to the returns that they require, and this would involve a complex authorisation process to allow agents to make changes within the systems.

Digitalisation of the tax system could reduce the errors in tax reporting by small and medium enterprises (SMEs) and reduce compliance costs for small businesses and landlords through the use of digital software to keep records. This is important because HMRC can only investigate the tax affairs of a small number of small businesses, and it is more cost effective to ensure that tax reporting is correct first time. For a small business, the compliance costs of ensuring the tax return is correct is far less than the cost of facing an investigation.

The tax gap for small businesses consists mainly of a large number of small errors on tax returns. Around one third of the errors relate to amounts of less than a thousand pounds. The cost of investigating those errors would amount to more than the tax recovered.

A project known as HMRC Assistance aims to incorporate real time nudges and prompts for taxpayers using MTD that can help to complete tax reporting correctly. The project is expected to contribute to the additional tax revenues resulting from MTD.

A public pilot project is to be launched in 2025, open to wide participation by taxpayers involved in MTD for income tax.