Institutional tunnel vision, missing taxpayers, and unintended consequences
Making Tax Digital for Income Tax (MTD ITSA) is coherent on paper but produces outcomes that often defy common sense in practice. Some taxpayers find themselves subject to a complex digital reporting regime even when the amounts of income involved are small and the tax at stake is minimal.
These outcomes were not caused by a single error or moment of incompetence. They emerged gradually from how the system was designed, consulted on, and discussed over time.
MTD ITSA was designed to reduce error, improve accuracy, standardise reporting, and increase visibility of income. From a compliance perspective, the underlying logic is straightforward: if income exists, it should be reported digitally.
What received far less attention were the behavioural and economic effects of increased compliance friction, including:
whether very small or marginal activities continue at all
whether compliance costs exceed the tax at stake
whether people are discouraged from starting or continuing low-level trading
The emphasis has been on maximising tax from declared income, rather than asking whether the design of the system affects affects how much people choose to earn or choose to declare.
Many taxpayers have trading or property income measured in hundreds or a few thousand pounds, often generating little or no tax revenue. Because such income falls below or close to long-standing allowances, and presents limited revenue risk, it has historically attracted little policy attention, even though the number of people affected may be large. MTD ITSA was not designed with these taxpayers as a central focus, increasing the risk of disproportionate outcomes.
Professional discussions about MTD ITSA naturally focused on taxpayers who needed professional support, or presented material compliance risk.
Taxpayers who are self-sufficient, digitally capable, and operating at a very small scale rarely featured in those discussions, despite being particularly sensitive to increases in compliance complexity.
No single group is solely responsible.
HMRC focused on compliance and process control
accountants focused on clients and operational impact
software providers focused on digital delivery
Each acted rationally within its own remit. But no one was tasked with considering the system from the perspective of low-salience taxpayers or from a wider UK economic efficiency standpoint.
As a result, taxpayers generating little revenue — but potentially large in number — were a low priority in both policy modelling and professional debate.
This helps explain why:
consultations focused on mechanics rather than long-term effects
examples centred on ongoing, economically significant businesses
quarterly reporting dominated discussion
small-scale or residual income was treated as marginal
The taxpayers most affected by the bonkers rules were largely invisible to both policy data and professional debate.
To understand how this happened in more detail, see:
2017 MTD Consultation: The Questions That Shaped the Outcome
How the framing of the original consultation constrained what could emerge.
HMRC & Accountants: a narrowing MTD conversation
How professional dialogue focused on quarterly reporting while longer-term effects fell out of view.
Together, they explain how a sensible policy of increased digitisation drifted into outcomes that are often bonkers in practice.