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Legacy IT is hindering the digital transformation of the UK tax system – HMRC

The Making Tax Digital programme has been delayed four times since its announcement in 2015.

By Sophia Waterfield

Legacy IT systems are to blame for delays in the digital transformation of the UK tax system, HM Revenue and Customs (HMRC) officials have said. The executives were speaking to a committee of MPs following the publication of a report that said the government department had been “too optimistic” with its original roadmap for the project.

An image of a self assessment tax calculation form and HMRC logo at the top.
HMRC faced questions about delays to its Making Tax Digital programme. (Photo by Gulpa/Shutterstock.

HMRC “underestimated the scale and complexity” of implementing the new system, according to three executives from the government department who were quizzed by MPs on parliament’s Public Accounts Committee at a hearing on Monday.

Jim Harra, HMRC chief executive, Jonathan Athow, director general of customer strategy and tax design, and Jo Rowland, the department’s director general of transformation, were speaking after a report published earlier this month by the National Audit Office (NAO), Progress with Making Tax Digital, said that HMRC had delayed its Making Tax Digital for Self Assessment programme four times since it was first announced in 2015.

It also said that the cost to implement the new system for VAT and Self Assessment business taxpayers with incomes of more than £30,000 would cost £1.3bn.

The committee had previously reported on the delays to Maxing Tax Digital, but called HMRC to an inquiry hearing following the investigation by NAO. This was to check on the progress towards finishing the programme and whether the latest plans would deliver value for money.

Making Tax Digital is considered HMRC’s flagship transformation programme, aiming to help businesses reduce errors in their tax records through digital record-keeping and compatible software. It has only been introduced for VAT, with pilots for Self Assessment being rolled out in 2025 for people with income over £50,000 per year.

HMRC couldn’t deliver on digital tax due to legacy systems, Brexit and Covid-19

Dame Meg Hiller, MP for Hackney South and Shoreditch and chair of the Public Accounts Committee, questioned Harra about why there had been delays to the programme for self-assessment, pointing to the mismatch between policy and the reality of the legacy systems.

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“There are two factors that led to the delay in the rephasing of the delivery,” explained Harra. “We initially underestimated the scale and complexity of the challenge, both for us and for the taxpayers and their agents in making the transition.” He also pointed to “events” that distracted the department.

The NAO report says that the Covid-19 pandemic and Brexit reduced the capacity to deliver Making Tax Digital. “In 2018, [HMRC] closed early a programme providing digital services so that individuals could self-serve rather than write to or call HMRC,” the report states. During the pandemic, specifically, HMRC redeployed employees to run digital systems needed for emergency support schemes.

Further challenged by Hiller on why the department underestimated the problems with its legacy systems, Hara confirmed that the department had not done “all the work” to identify the complexity of trying to deliver the new system on the old legacy technologies, nor had it fully explored re-platforming, or migrating data from the older systems.

“The quality of that data meant that it was not a simple matter of migrating it,” he said.

HMRC’s original plan to introduce the digital tax system by 2020 was not realistic, the NAO report says, because it required “significant behavioural, administrative and technological change for the programme to succeed.”

“Changes for Self Assessment were most ambitious in timing and scope: they were due to complete by 2018 including requirements for more frequent tax submissions from business taxpayers,” the NAO says. “The timeframes for [Making Tax Digital] were agreed before HMRC had fully explored the range of options.”

Issues with VAT digital transformation incurred higher costs

The NAO also reported that the introduction of digital record keeping for VAT in April 2019 brought about more problems with moving from legacy systems, which in turn cost more than HMRC expected.

“[HMRC] estimates Making Tax Digital for VAT had cost around £295m (£322m at 2022-23 prices) by March 2023; around £70m more than it had originally expected [the programme] would cost for all three business taxes,” the NAO reports. It explained that the department did not anticipate the extent of data issues involved in moving tax records and took 15 months longer than planned to move all 3.2 million VAT records off legacy systems.

Rowland also told the inquiry that the pilot for digital VAT helped the department learn lessons about the complexities needed for self-assessment income tax. VAT records were migrated onto the modern tax management platform by March 2023, however, it has 14 million more records to move from legacy systems for self-assessment and corporation tax.

“Until these records are migrated, HMRC will continue to have the costs and complexity of running its legacy systems alongside the new system,” said the NAO report.

Digital tax pilot will be a closed affair until 2025

Rowland told the committee that the pilot for self-assessment was “a very controlled” one, which had 137 customers and 17 software developers taking part.

“We absolutely want to [pilot it thoroughly and evaluate the pilot before the mandate,” she said. “Stage one of the pilot is very technical, so as we build the functionality that the customer can use and as software developers come up with new products, we’ve got a very controlled pilot with currently 137 customers.”

She added that the pilot will “grow in numbers” between now and 2025, but it will remain controlled while all elements of the customer journey and different income types are tested. But she says that this pilot will be opening up as “near-unrestricted as possible” for the first cohort of customers – those earning over £50,000 per year.

Pilots in the past have even been scrutinised by the NAO and the Public Accounts Committee due to ineffective scaling. In 2017, HMRC launched a pilot but set restrictive requirements for volunteers: “Despite the range of potential scenarios to test, the scale of testing and piloting was limited,” said the report. “Since 2017, more than a thousand taxpayers signed up for the pilot but HMRC needed to remove most of these due to ineligibility, leaving only 15 participants when the pilot was closed to new entrants in 2022.”

It’s not the first time government departments have failed to scale pilots effectively. As reported by Tech Monitor, the Department for Work and Pensions had to admit that only 60 people a day could process an online claim for Personal Independence Payment benefits, three years after the pilot digital system was launched. 

Digital transformation of the tax system is ‘necessary’

According to the NAO, HMRC considers the digital transformation of the tax system as a necessity and there is a strong case for the department to move to a more modern system.

“Its legacy systems are costly to run and maintain and lack resilience,” the report said. “Modern digital systems also provide the foundation for improving services, including a joined-up view of taxpayers’ affairs.”

HMRC also says that Making Tax Digital will contribute to generating additional tax revenue, as seen with the digital VAT system.

“In March 2022 HMRC reported that there was a high likelihood that Making Tax Digital was generating additional tax revenue by making it easier for businesses to get their tax right,” the report said. “HMRC estimated this equated to £185m to £195m of additional VAT in 2019-20.”

However, there are still concerns that HMRC has set itself a “very challenging plan” to implement the programme fully by 2026/27. NAO says the scale of the work remains uncertain and that HMRC hasn’t been able to provide it with “any measures of progress to the end of 2022,” and that it’s unknown how much of its investment has advanced the system development.

“HMRC’s current plans indicate it has major work to complete on all the significant elements (restarting its pilot with business taxpayers, moving tax systems and records, and changing its internal processes), and this must all be done in parallel,” explained the NAO.

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