Making Tax Digital was created by the HMRC to make it "easier for individuals and businesses to report their income accurately and keep on top of their affairs." MTD is a phased initiative and the first phase, Making Tax Digital for VAT was introduced in 2019. This first initiative related to keeping digital records and using accounting software to complete VAT tax returns. This is only applicable to VAT-registered businesses with a taxable turnover above the VAT threshold of £85,000.
All sounds good in theory. However, the gap between the amount of VAT paid and VAT expected to be paid has increased by £2.3bn during the first year of MTD for VAT. Reducing this gap was arguably one of the key justifications for introducing MTD, and digitalisation should mean less occurrences of error.
The VAT gap rose from £10bn to £12.3bn over 2019/20, raising the total VAT gap from 7% to 8.4% of total VAT receipts. The amount of VAT lost through tax avoidance is £0.1 bn, an amount that has remained steady over the last six years. So, with the introduction of MTD how has there been an additional loss of £2.3bn of VAT during this period?
MTD should have reduced the amount of VAT lost just with its claims to remove taxpayer error and carelessness through digitalisation. However, HMRC has not highlighted any reduction in the level of VAT lost to taxpayer error. It also hasn't broken down the total of the tax gap due to carelessness or to taxpayer error, into the different taxes. Actually, the amount of tax lost to carelessness has increased significantly from £6.1bn to £6.7bn, and the amount lost through taxpayer error has also increased from £3.1bn to £3.7bn.
John Barnett, Chair of CIOT's Technical Policy and Oversight Committee, said: "Whilst we recognise that we are in the early days of MTD and the published tax gap data doesn't allow a granular analysis, we are surprised to see such a significant increase in these elements of the tax gap. MTD is supposed to reduce the tax lost from these behaviours and bring in hundreds of millions of pounds of additional revenue. So far there is no clear sign that this is happening."
The CIOT has asked HMRC to assess the effectiveness of MTD, and whether the administrative burden it puts upon business is reasonable, before it expands the MTD program further.