Making Tax Digital

Lord Livermore Excerpts

Wednesday 17th September 2025 Lords Chamber

[Lord Pitkeathley of Camden Town]

To ask His Majesty’s Government what plans they have to use the rollout of Making Tax Digital as a strategic entry point to encourage wider adoption of digital tools among small businesses.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, from April 2026, Making Tax Digital for income tax will be phased in for unincorporated businesses, self-employed individuals and landlords, starting with those with income over £50,000. This will place small businesses on a more digital footing and should act as a catalyst for greater adoption of new digital technologies, unlocking the significant productivity benefits associated with digitalisation.

[Lord Pitkeathley of Camden Town (Lab)]

I thank my noble friend the Minister for the helpful Answer. Given that Making Tax Digital has significantly increased the cost of compliance for small businesses through mandatory software and subscriptions, what steps are the Government taking to mitigate those burdens? Might this rollout be the right moment to consider an accounting software switch service modelled on the banking version, and to require that such software includes prompts to highlight underused tax reliefs as a core feature, rather than an added cost?

[Lord Livermore (Lab)]

I am grateful to my noble friend for his question. HMRC has taken a range of steps to ensure that the adoption costs of Making Tax Digital are kept to a minimum, including working with industry to ensure that there is free and low-cost software available where necessary. The use of Making Tax Digital should bring significant benefits by increasing accuracy, reducing the time it takes to complete tax returns, and therefore increasing productivity. The rollout of Making Tax Digital encourages taxpayers to adopt digital solutions. For example, of those businesses already using Making Tax Digital for VAT, one-third have used the software for other business processes. More broadly, the Government are actively promoting digital technology adoption for small businesses, which is key to unlocking productivity and growth, and helping firms reduce administrative burdens. In our small business plan, we accepted all 10 recommendations from the industry-led Digital Adoption Taskforce.

[Baroness Kramer (LD)]

My Lords, Making Tax Digital is not targeted at upskilling self-employed people and landlords; it is about cutting costs at HMRC. The requirements have led to a surge in calls to HMRC for guidance, but over half a million calls went unhandled in January, and the same in February, the last months for which I have numbers. How is this being handled, given that people who fail to comply face steep fines and penalties, and that when they rely on the internet they are at risk of being scammed?

[Lord Livermore (Lab)]

If I may, I disagree with the premise of the noble Baroness’s question. Making Tax Digital is about increasing productivity for businesses and helping HMRC close the tax gap, which I am sure the noble Baroness would agree should be a priority. There are clear benefits of Making Tax Digital, such as productivity gains to improve business operations, easier and faster tax returns by promoting digital record-keeping, and greater accuracy by reducing errors for tracking paper records. There is a substantial tax gap, and Making Tax Digital will reduce that by nearly £6 billion—some £4 billion for VAT and £1.95 billion for income tax. By doing that, and enabling HMRC to have the correct resources, it is able to direct resources where they are most needed, which addresses the point the noble Baroness was making.

[Lord Geddes (Con)]

My Lords, will it be mandatory?

[Lord Livermore (Lab)]

Yes.

[Lord Foulkes of Cumnock (Lab Co-op)]

That was a good answer. I know that my noble friend the Minister is very diplomatic. But in view of the fact that there is huge controversy over the tax affairs of Mr Nigel Farage in relation to his house in Clacton and the huge amount of money that he gets from various sources, including GB News, is it not about time that the Government looked at asking Members of the other House to have their tax affairs made public?

[Lord Livermore (Lab)]

It is not for me to comment on the tax affairs of any one individual.

[Lord Forsyth of Drumlean (Con)]

Does the Minister recall his time on the Economic Affairs Committee and the report which was produced—I am not sure whether he was still on the committee at that time—on Making Tax Digital? It welcomed the move but thought it was important to take account of the burdens placed on small businesses and the costs that were involved. Surely at a time when the economy is, shall we say, not exactly performing as he might hope, might it not be better to look at this again, with a view to the levels of fines and the speed with which it is being implemented? There was considerable evidence then that HMRC was simply contracting out its job of collecting taxes to people who were trying to run businesses in difficult times. Surely that is not acceptable.

[Lord Livermore (Lab)]

I am grateful to the noble Lord for his question. I of course remember my time on the Economic Affairs Committee, and I was privileged to serve when he was the chair of that committee. We produced many high-quality reports. I do not think I was on the committee at the time of the report that the noble Lord refers to, but I fully appreciate that there are costs to business of doing this—I think the recurring cost is estimated to be, on average, £110 annually. It is important to say that HMRC has worked with industry to ensure that a range of software is available, including free and low-cost software, and of course those costs do not take into account the benefits. There are important productivity and time-saving benefits.

As regards Making Tax Digital for VAT, HMRC has carried out a detailed evaluation of the impact of that, which shows that two-thirds of businesses report time-saving benefits. Of businesses that were using digital accounting software for the first time, 80% reported significant benefits, a quarter reported improved productivity and one-third had used Making Tax Digital software for other business processes. At a time when productivity is such a challenge—an issue that we frequently discuss in this House—and when small businesses make up such a large part of the economy, if we can see two-thirds of small businesses making significant productivity gains, that is a benefit worth having.

[The Earl of Kinnoull (CB)]

My Lords, I want to go back to the question from the noble Baroness, Lady Kramer, about helplines. I have to say that, for me—I declare my interest as a small farmer with a small business that wants to do things online—the helpline is not working at the moment, and we heard the numbers that show that it is not working. The most important thing is that that is understood and actions are taking place to make the helpline work, because the digital system will work really well as long as the helpline works too.

[Lord Livermore (Lab)]

I reassure the noble Lord that I absolutely understand that. I recently answered a Written Question on this exact point, so I am more than happy to share with the noble Lord the Answer to that Question.

[Lord Watts (Lab)]

My Lords, does the Minister agree that everyone who pays PAYE has to pay their fair share of tax, but an awful lot of people do not pay their fair share of tax? Is not the use of technology one way in which we can make sure that they make their contribution?

[Lord Livermore (Lab)]

My noble friend makes an important point; the tax gap is a significant issue. Small businesses account for some 60% of that tax gap, much of which comes from unintended errors. One of the big advantages of Making Tax Digital is having more frequent reporting, and therefore there are far fewer errors. There is also the pre-population of end-of-year tax returns, which again reduces errors. If we can reduce some of those errors, we can reduce quite a significant part of the tax gap.

[Baroness Neville-Rolfe (Con)]

My Lords, in the Government’s plan for SMEs, Backing Your Business, they claim that they are prioritising growth and productivity potential—good news. However, in a Written Answer last week to the noble Baroness, Lady Maclean of Redditch, the Government revealed that they have no idea of the level of cumulative administrative costs of regulation for small business. Does the Minister agree that before his Government impose yet more onerous regulations on small businesses, such as through the Employment Rights Bill, they should find out the existing costs of their regulatory onslaughts and do something about them?

[Lord Livermore (Lab)]

It may surprise the noble Baroness to hear that I absolutely agree. As part of our regulation action plan, we committed to reducing the regulatory burden on businesses by 25%. We must have a benchmark from which we reduce that burden. We are engaged in doing that, and, as I said, I completely agree with the noble Baroness.

[Lord Bellingham (Con)]

On the shadow Minister’s point about the impact assessment, the Government’s own impact assessment of the Employment Rights Bill puts the costs at £5 billion extra. How is that going to help the Government’s growth agenda?

[Lord Livermore (Lab)]

We have an extensive growth agenda, not least in the Planning and Infrastructure Bill that we talked about yesterday, and I hope all noble Lords will help that to move swiftly through the House.