Costs of MTD compliance have far exceeded government estimates

Results of an online survey conducted by the Chartered Institute of Taxation and Association of Taxation Technicians about making tax digital (MTD) suggest that the project is far from achieving its goals. As a result, the organisations are calling for a comprehensive review of the implementation of MTD for VAT before HMRC goes ahead with plans to roll out digital reporting obligations more widely.

The survey explored businesses’ and agents’ opinions about MTD for VAT and the future of the whole digital programme. There were a total of 1,091 responses.

More than 70% of respondents considered that MTD for VAT has had little impact on errors made by their clients, with most remaining responses reporting an increase in errors rather than a reduction.

The costs of MTD compliance have far exceeded government estimates, according to respondents. HMRC estimated the average transition cost for each VAT-registered business to be £109, but fewer than 10% of respondents estimated their or their clients’ costs at or below that amount, with 45% estimating costs between £109 and £500. About 12% estimated their costs were more than £5,000.

On the continuing costs of MTD for VAT compliance, only 8% said these would be below the government’s estimate of £43 a year; 54% put them between £43 and £500, and 20% between £500 and £1,000. Those working in-house for larger businesses reported the highest costs with 46% stating transition costs were above £5,000.

Tax advisers play a large role in supporting businesses with MTD for VAT. Some 56% of agents said more than three-quarters of their clients required help with the move to digital record keeping. More than a third of agents said a similar proportion require regular help with keeping digital records and nearly half said cllients needed help filing their VAT returns. Agents have also borne significant costs in helping their clients become compliant. More than 70% of agents said they had incurred unrecoverable time and costs of over £100 for each client within the scope of MTD for VAT.

On increased productivity in their organisation as a result of MTD for VAT, only 14% of advisers said there had been an increase and 55% considered there had been a decrease in productivity.

Tina Riches, chair of the joint CIOT and ATT digitalisation and agent services committee, said: ‘These initial results underline our concerns that, far from bringing benefits to businesses and the exchequer, MTD for VAT has so far created additional, costly obligations for most businesses beyond what was predicted by HMRC. The results suggest there is a very long way to go to achieve the benefits claimed by the government about MTD for VAT. The government should undertake a detailed review of MTD for VAT, and determine any benefits, before rolling out MTD more widely.’

She was pleased that HMRC had recognised the commitment of agents to help their clients comply with the new rules but said the level of costs borne by agents was ‘both unacceptable and unsustainable’. She said a truncated pilot, issues with the agent services account, and dealing with many teething problems were key contributors to this, as well as limits to the support that clients are willing and able to pay for.

On rolling out MTD to other taxes, 49% of respondents said this should be to voluntarily VAT-registered businesses, with 40% suggesting it should extend to corporation tax for businesses who are already in the scope of MTD for VAT. 74% thought income tax for non-VAT registered individuals was the last area that should be brought into MTD. April 2025 was also the most popular date from which any further compulsory extension of MTD should take effect, and a minimum two-year pilot was preferred.

Ms Riches said: ‘It is no surprise that mandating MTD for income tax next is the least favoured option. As we anticipated, the roll out of MTD for VAT has proven more difficult than the government expected. MTD for income tax would encompass a significantly greater number of taxpayers, many of whom will be less digitally capable than VAT-registered businesses, and would be much more complex. Taxpayers will require significant training and support, and we are concerned that their agents, the tax charities and HMRC, simply will not be able to cope.’