Making Tax Digital (MTD) is set to cost £1.3 billion in total - five times the original budget of £226 million, according to the National Audit Office (NAO).
In a recent report, the NAO said that repeated delays to the tax digitalisation scheme have increased costs and undermined the programme's credibility.
The spending watchdog also claimed that the initial timeframe had been "unrealistic", saying these issues could have been avoided if HMRC had taken more time to explore its options fully.
Furthermore, the combined cost to HMRC and taxpayers have exceeded the additional tax revenue expected from implementing MTD, the NAO said.
To address these issues, the NAO recommended that HMRC prepare a separate "business case" for MTD for income tax self-assessment that includes a "comprehensive and up-to-date assessment of the costs to customers of implementing MTD".
It also recommended HMRC "follows through on its public commitment to work with stakeholders" on how to best develop the new system and resolve outstanding technical issues.
Commenting on the report's findings, Gareth Davies, head of the NAO, said:
"The repeated delays and rephasing of MTD have undermined the programme's credibility and increased its costs.
"HMRC 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."
MTD "spiralling out of control"
The Association of Taxation Technicians (ATT) and the Chartered Institute of Taxation (CIOT) have both lambasted HMRC, saying the scheme is "spiralling out of control".
Alison Kerrey, chair of the joint CIOT and ATT digitalisation and agent services committee, said:
"HMRC and the Government's execution of this major change to the tax system feels like it is out of control, with spiralling costs, unrealistic timescales, and questionable benefits.
"While we support digitalisation, the report backs up our concerns that HMRC's estimates have vastly underestimated costs to taxpayers and overestimated benefits to the exchequer - it is time to pause and take stock.
"To announce a project as substantial as MTD, with significant impacts for businesses, agents, software companies and HMRC themselves, without being able to point to a proper business case beforehand, simply beggars belief."
In the ‘damning' NAO report, the authors suggested that MTD was announced before any business case had been prepared. Furthermore, during 2022-23, moving VAT records onto the new system initially led to an overstatement of VAT liabilities by around £5 billion.
Kerrey continued in saying:
"We have repeatedly questioned whether the business case for MTD stacks up and fully agree with the NAO that a fresh, complete business case needs preparing.
"Even the latest estimate of a 2:1 return on investment still seems marginal, based on experiences to date with spiralling costs, speculative revenue benefits, and the need to operate two systems for the foreseeable future.
"The haste with which MTD is being pushed forward, without sufficient preparation or testing, and with questionable business justification, has itself caused errors totalling more than MTD is expected to generate by 2033-34."
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