Harra praises MTD impact in last appearance before Public Accounts Committee
Making Tax Digital for VAT will raise £4 billion by 2030 and is benefiting businesses that have signed up to it, HMRC chief executive Jim Harra told MPs at a hearing today

In what was acknowledged to be his final appearance before the Public Accounts Committee (PAC) before he retires in April, Harra was also asked about –
- Whether online marketplaces should collect VAT from all traders
- Why HMRC doesn’t publish figures for the cost of tax compliance to individuals
- Why HMRC have more senior members of staff than other departments
- Why costs of VAT and corporation tax administration have increased
Harra was joined by Justin Holliday, HMRC’s Chief Finance Officer, and Lucy Pink, Director of HMRC strategies, for the hearing, which is part of a short inquiry into The Cost of the Tax System, building on a National Audit Office report on the drivers of cost in the tax system, published earlier this year.
This report covers only a small fraction of the exchanges which took place during the evidence session, which lasted around two hours. It can be viewed in full here. In due course a transcript should be available from here.
Making Tax Digital (MTD)
Labour MP Chris Kane began this part of the hearing by observing that MTD for income tax self-assessment is estimated to bring £561 million of transitional costs, plus annual costs of around £196 million. Why is MTD increasing burdens on self-assessment taxpayers, he asked.
Harra explained that the key benefit of MTD that HMRC score is reduction in non-compliance. Requiring small businesses to use business accounting software to keep their records up to date and make more accurate filings to HMRC increases compliance. Businesses that do not currently use that software incur a cost.
However, Harra said, HMRC analysis published last week indicates that such businesses report “significant benefits” from MTD: “VAT payers who have moved to business accounting software for the purpose of MTD have reported that they see other benefits for their own business.” Promoting the digitalization of small businesses promotes the productivity of these businesses as well as compliance, he added.
Harra told the MPs that the first phase of MTD – MTD for VAT – through improving tax compliance, will deliver £4 billion of additional tax revenues by 2029-30, in addition to the benefits for taxpayers he had mentioned. But he acknowledged the costs to business, estimated at £249 million one off costs plus ongoing running costs totaling £544 million over five years.
Kane asked what lessons could be drawn from the last 10 years of MTD as we start the next stage.
“When we have completed the current phase of MTD we will have virtually every business in the UK using business accounting software that speaks directly to our systems and that is a base from which we can exploit further,” said Harra. For example, building in functionality that can guide and support taxpayers better, or be useful in other ways, such as in relation to e-invoicing.
Kane emphasized the importance of ensuring the vision for digitalization is driven by users not just designers and that all levels of digital capability will be heard.
Harra said that there had been much anxiety before the last stage of MTD, but the evaluation published last week shows users found migrating easier than they anticipated. Those who invested in better software have seen greater benefits than those who went for basic products, he added.
Online marketplaces
PAC chair, Sir Geoffrey Clifton-Brown (Conservative), followed up on questioning at a previous PAC session, suggesting that too many overseas companies are still avoiding VAT by presenting themselves as UK based. “Some online marketplaces have suggested that collecting VAT from all online traders using their sites would help close off this risk”, he said. “Would this be administratively workable within the current VAT rules?”
Jim Harra said this was a question for ministers and would be something HMRC keep under review. “The general practice is that UK businesses manage their own tax compliance,” he continued, assuring MPs that HMRC are continuing to work with the marketplaces to make sue they operate good quality processes for identifying businesses which are not established in the UK but purport to be. Generally the marketplaces are “rising to the challenge” but “one or two we are working very closely with to improve what they do”.
Administrative burdens on taxpayers
Labour MP Lloyd Hatton asked why large businesses get additional taxpayer support through the Large Business Directorate.
Jim Harra challenged the premise, saying that the additional resource is in the Customer Compliance Group and their job is to make sure the businesses comply with their obligations. This reflects the level of risk posed.
Hatton asked why HMRC gives less attention to the cost to individuals of tax compliance than it does to the cost to business.
Lucy Pink challenged this, saying HMRC look at the wider experience of individuals – “the time taken, the ease, the understanding”. We talk about some of these elements in our TIINs, she said, but often in qualitative rather than quantitative terms.
Hatton challenged the officials over the figure HMRC use of £18.66 per hour as a value for customer time, noting that it is now three years out of date. He also said that “the public at large” find it “deeply frustrating” that there are more than a thousand people in HMRC working with wealthy individuals, but many millions of individuals taxpayers “find it really difficult to get anything out of HMRC”.
Simplification
The issue of tax simplification came up at two separate points in the proceedings.
Lloyd Hatton asked about the impact of abolishing the Office of Tax Simplification.
Jim Harra explained that there is now “a direct responsibility on HMRC and Treasury policy advisers to include simplification in their advice to ministers and to track that”. “A big challenge in simplification is that it is often very difficult to simplify the tax policy itself because the complexity is there for a whole variety of good reasons – trying to achieve good policy objectives, maintain fairness. HMRC’s job is to mask as much of that complexity as we possibly can for the taxpayer and to make it as simple as possible for the taxpayer to understand their tax affairs, understand what they need to do and enable them to take whatever action they need to take.”
Harra had earlier been asked by another Labour MP, Oliver Ryan, whether his views on the tax system and its complexity were being captured in an ‘exit interview’ before his departure. “Do you see areas in the tax system which need ironing out if you want proper efficiency?” he asked.
Harra said he was doing a full handover to his successor, but on the question of the tax system, it is very complex and that complexity drives opportunities for error, evasion and avoidance, as well as costs, including for HMRC by driving more contact from taxpayers. “However a lot of that complexity is down to policy objectives that the government wants to achieve, and fairness it wants to achieve in the tax system”. HMRC’s job is to give the best possible advice so the right trade offs are made by ministers.
HMRC staffing
Labour MP Nesil Caliskan asked why the cost of HMRC staffing is rising. The main driver is an increased number of compliance staff aimed at reducing the tax gap, said Jim Harra.
Caliskan asked why HMRC has more senior members of staff compared to other departments? Harra said that this too was the growth of the compliance department. Jobs in compliance tend to be higher graded than those in customer services, he explained, reflecting the competitive market for tax professionals. “I don’t think HMRC is too top heavy,” he said.
Caliskan also probed the question of HMRC ‘productivity’ suggesting the tax authority is becoming less productive and compares badly to other departments. Harra replied that recruiting new staff leads to a dip in productivity as new staff take years to get up to speed (they are regarded as having zero productivity in their first year) and existing staff need to train and mentor them in their early years.
HMRC administration costs
Oliver Ryan asked why the costs of serving each corporation tax and VAT taxpayer have increased while the cost per income tax payer has fallen.
Jim Harra replied that a significant part of the VAT cost will have been the introduction of MTD. Justin Holliday said that he thought the costs were total costs in the system divided by number of taxpayers, so as HMRC has put in more compliance effort the average cost per taxpayer has gone up. On corporation tax Harra noted that the tax gap has risen – especially in respect of small corporates – and getting it down is “a major focus”.
Ryan probed whether ‘cost per taxpayer’ was a good measure of efficiency. We segment compliance work into various groups so applying across all taxpayers may not give a useful metric, said Harra. Holliday noted that freezing thresholds increases the number of taxpayers which would increase productivity by this measure.
Other issues covered
The MPs questioned HMRC about the pace and cost of replacing legacy IT systems, prompting Jim Harra to tell them: “Today I am not in the position where I have a tolerable level of risk in my IT estate and we need to continue investing in it.” Justin Holliday told them HMRC “were starting from a low base” on IT and had found more to do than they understood initially. “We definitely have a plan,” he said. “[But] we don’t know how long it is going to take.”
Harra told the MPs he is frustrated by how much paper output HMRC generate – this is partly driven by legislation, partly by not having the right information from taxpayers and partly by HMRC’s processes. Ministers are “absolutely on this”, he added.
Asked about the challenges of tax devolution, Harra identified two potential issues: higher rates in Scotland potentially creating a greater incentive to evade or avoid tax, and compliance with the residence rule. At the moment our view is that the differentials are not significant enough to manifest in taxpayer behaviour and require separate management, he assessed.
The chair said that the committee will be conducting an enquiry into tax collection from wealthy individuals “in the next few months”.
Other topics covered during the session included measurement of the offshore tax gap, the impact of freezing thresholds, the e-invoicing consultation and HMRC’s ‘regime ownership model’.