A report published by the National Audit Office (NAO) has found that HMRC's Making Tax Digital (MTD) initiative is expected to cost around £1 billion more than its initial £226 million budget, which was forecast in 2016.

MTD is intended to modernise the tax system for income tax self assessment, VAT and corporation tax. It requires taxpayers to keep records digitally and submit quarterly tax returns.

The NAO labelled HMRC's initial timeframe for the implementation of MTD as 'unrealistic'. It stated that bosses 'failed to take the scale of the task into account'.

According to the NAO, HMRC’s ability to secure value for money from MTD now relies on exploring the options for reducing costs, resolving questions about design and rigorously managing delivery risks.  

The NAO has recommended that HMRC prepares a separate business case for MTD for Income Tax Self Assessment (MTD for ITSA) so that those making decisions can better understand the costs, benefits and risks associated with the initiative. It has urged HMRC to include 'greater clarity' on how taxpayers will be affected.

Gareth Davies, Head of the NAO, said:

'The repeated delays and rephasing of MTD have undermined the programme's credibility and increased its costs. They put at risk the support of taxpayers and delivery partners, including those who are essential to the programme succeeding.

‘HMRC’s plan to digitalise the tax system has the potential to improve the system’s efficiency and effectiveness. It has made some recent progress on VAT but it has not yet tackled the most complex elements of the programme and significant delivery risks remain.’