In the latest documents released with the Finance Bill 2017-18, HMRC is saying the estimated transitional cost to the mandated population of 1.2m businesses is £131m with these costs potentially eligible for full tax relief. This is the equivalent of £109 per affected business, less than half the original £280 figure put out by HMRC and a much disputed figure as many tax experts felt this was too low.

The estimated steady-state cost to the mandated business population is £52m, or £43 per business, with these costs potentially eligible for full tax relief. Estimated costs depend on final software solutions, potential availability of free software to the mandated population and individual providers’ pricing structures, HMRC says.

It also predicts an ongoing net cost of £37m to VAT registered businesses with a turnover above the VAT threshold, equivalent to £30 per business.

The original Making Tax Digital proposals phased in the implementation of digital record keeping and quarterly updating by businesses, the self-employed and landlords for income tax self assessment (ITSA), VAT and corporation tax between tax years 2018/19 and 2020/21.

Following a furore over the speed of introduction of the quarterly reporting system and the snap election, the government caved into strong lobbying from all sides including MPs and the House of Lords, and confirmed in July  that businesses would only to use the Making Tax Digital system for VAT reporting from April 2019.

The wider requirements for Making Tax Digital for all businesses will not come in before 2020 at the earliest.

In a technical note published alongside the Finance Bill 2017-18, HMRC says it now estimates that the behavioural impacts of Making Tax Digital will contribute over £1bn to the Exchequer by 2022/ 2023.

This compares with earlier forecasts that Making Tax Digital would deliver £2bn by 2021/22 and provide on-going savings for business of £100m per year.

In HMRC’s previous impact assessment estimates the bulk of savings were made by self assessment businesses with turnover less than £85,000, and operating basic or paper-based accounting systems, moving to the new digital processes. These no longer form part of the mandated population.

This has also had an effect on one of the most hotly debated issues around Making Tax Digital, which is the costs to business of compliance. Initially the transitional costs for business were estimated to be £1bn over 2017/18 to 2020/21 (or £280 per business for the four years).

This estimate became the subject of intense argument between the Treasury and the Federation of Small Businesses (FSB), which said the move to quarterly digital updating on tax was likely to result in additional compliance costs of £2,770 per business per year.

HMRC now says transitional costs may be lower than was thought because a significant majority of businesses with a turnover in excess of the VAT threshold will already have the necessary digital tools to operate Making Tax Digital.

HMRC stated: ‘It should be noted that those now mandated to join Making Tax Digital from April 2019 for their VAT obligations are businesses that are likely to be more digitally ready and capable of making an earlier transition, with the majority already reporting VAT quarterly.

‘Where they have alternative reporting arrangements, these will be maintained. Because a significant proportion of the mandated population already uses software and has less need of new or upgraded hardware to operate Making Tax Digital these transitional costs are lower than previously estimated.’

Making Tax Digital now applies to businesses with turnover above the VAT threshold (currently £85,000). Businesses with turnover below the VAT threshold will not be required to use the system but can choose to do so. Businesses will also be able opt in for other taxes, benefitting from a streamlined, digital experience.

The government has said it will not widen the scope of Making Tax Digital beyond VAT before the system has been shown to work, and not before April 2020 at the earliest.

HMRC Guidance Making Tax Digital for Business issued 1 December 2017

Report by Pat Sweet, additional reporting by Sara White