What HMRC and the NAO found about MTD for VAT

The two VAT cohorts

April 2019

Businesses with taxable turnover over the £85,000 threshold (HMRC news release, 7 January 2022).

By December 2021

Nearly 1.6 million taxpayers had joined, with more than 11 million returns submitted.

April 2022

The 1.1 million VAT-registered businesses under the threshold (extension of Making Tax Digital for VAT).

Findings from HMRC's final evaluation

Software, errors and costs

HMRC's final evaluation, published 27 February 2025, draws on four studies: IFF Research (2021), HMRC (2022), Verian (2024) and Verian (2025). The 2019 figures come from IFF Research and the 2022 figures from Verian (2025).

A new software package was the financial cost reported by 26% of the 2019 cohort and 27% of the 2022 cohort. Discussing the changes with an agent was a cost for 12% and 13%. Among businesses using fully functional software, the time saved was estimated at between 26 and 40 hours per business per year, valued at between £603 million and £915 million across users in 2022 to 2023 (HMRC: final evaluation).

30% of the 2019 cohort felt the benefits outweighed the costs. In the 2022 cohort, 41% of smaller businesses agreed.

Records and agents

Among businesses mandated from April 2019, 48% kept their VAT records up to date continuously, against 38% before Making Tax Digital (HMRC: final evaluation).

Discussing the changes with a tax agent, such as an accountant or bookkeeper, was the preparation reported by 65% of the 2019 cohort and 55% of the 2022 cohort.

HMRC concluded that the service had the expected impacts: more businesses kept digital records and updated them more often, customer error fell and additional revenue came in as forecast. It also found most businesses incurred costs and most saw at least one benefit.

Additional VAT revenue

HMRC's revenue evaluation, published 10 March 2022, estimated additional VAT of £57 per business per quarter for businesses over the £85,000 threshold, a 0.9% increase, and £19 for those under it, a 2.2% increase. It put total additional revenue for 2019 to 2020 at £185 million or £195 million depending on the method.

The National Audit Office noted some uncertainty over whether part of the increase came from other factors.

What the National Audit Office reported

• HMRC took 15 months longer than planned to move all 3.2 million VAT records (NAO, Progress with Making Tax Digital, 12 June 2023).
• Making Tax Digital for VAT had cost £295 million (£322 million at 2022 to 2023 prices) by March 2023, £70 million more than HMRC originally expected the programme to cost for all three business taxes.
• The smaller VAT traders joined in 2022, three years later than first planned.
• HMRC's estimated programme costs had risen to £1.3 billion, a 400% real-terms increase since 2016.
• HMRC expected the programme to bring in £3.9 billion of additional tax by 2033 to 2034.
• The Income Tax pilot opened in April 2017 and had 15 participants when it closed to new entrants in 2022.

Penalties

VAT moved to points-based late submission penalties for periods starting on or after 1 January 2023, with a £200 penalty at the threshold (HMRC: VAT late submission penalties). Making Tax Digital for Income Tax uses the same structure with a threshold of 4 points (HMRC: penalties). See Making Tax Digital for Income Tax penalties.

Questions