Evaluating additional tax revenue from Making Tax Digital for VAT
This report evaluates the additional tax revenue that has been generated when businesses have joined Making Tax Digital for VAT
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This technical paper estimates the additional VAT tax revenue generated when businesses have joined Making Tax Digital for VAT. Additional tax revenue is expected to arise because Making Tax Digital compatible software reduces the scope for making errors when keeping records and filing tax returns. This study is an important part of HMRC’s evaluation of Making Tax Digital.
The study uses VAT data from the pilot phases of Making Tax Digital to compare businesses that have voluntarily signed-up to Making Tax Digital to similar businesses that have not signed-up. The additional tax revenue generated due to a reduction in errors on tax returns filed through Making Tax Digital is estimated by comparing the average declared tax liability between the two groups. Estimates have been calculated separately for business populations below and above the £85,000 VAT turnover threshold:
- for the population below the £85,000 turnover threshold, the estimate of the average additional tax revenue from Making Tax Digital is £19 per business per quarter - this represents a 2.2% increase from the average liability estimated had the businesses not signed-up to Making Tax Digital
- for the population above the threshold, the estimate of the average additional tax revenue from Making Tax Digital is £57 per business per quarter - this represents a 0.9% increase from the average amount estimated had the businesses not signed-up to Making Tax Digital
The results indicate that there is likely to be a positive additional tax revenue for both populations. The total additional tax revenue generated in the 2019 to 2020 tax year is estimated to be of a similar magnitude to the previously published final forecast estimate of £115 million, which was certified by the Office for Budget Responsibility.
In line with best practice, the methodological approach and interpretation of the results have been peer reviewed and validated by independent academics.
Please note that this is a technical report that contains some complex statistical terms.