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MTD software study flags confusion and frustration

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A study looking at how businesses choose MTD-compatible software has highlighted confusion from users about the purpose of the project, choice paralysis when picking appropriate tools, and frustration at opaque pricing models.

15th Mar 2023
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Research conducted on behalf of HMRC was commissioned to understand business decision-making when choosing MTD-compatible software and the levels of satisfaction with that software thereafter. It involved in-depth interviews and focus groups with two sets of businesses: those with annual turnover above the VAT threshold and those below.

While the paper focused mainly on MTD VAT software choices, it also included a section on Making Tax Digital for income tax self assessment (MTD ITSA).

MTD awareness gap

Those participating in the research consistently highlighted their confusion about the purpose, meaning and implications of MTD, and the survey flagged the awareness stage as a particular frustration.

Common reactions included the shock of finding out about the need for specific MTD tools, confusion about what MTD for VAT involved, fear of the consequences of not complying, and irritation about having to adapt existing processes or spend more on software.

Participants highlighted that HMRC communications about MTD needed to be “better designed to grab their attention and engage them”. For many, the keystone to this would be to “provide a clear explanation of what MTD is, the purpose of it and what it will mean in practice”. 

In the words of one focus group user: “What HMRC hasn’t done, is it hasn’t made the case to businesses for why they should bother with MTD in the first place. They could do a 40–60 second elevator pitch to tell you why using this stuff is a good idea.”

Many participants, even after becoming MTD compliant, said that they still did not really understand what MTD is or why HMRC introduced it.

Choice paralysis

When researching software options, participants said they did not know where to start and most felt overwhelmed by the number of options they needed to choose from. HMRC’s current Making Tax Digital for VAT software choices page displays 567 options, and one focus group participant stated they had encountered “choice paralysis” on the site.

When choosing software options, many businesses relied on accountants for advice, or a combination of recommendations, and information from HMRC or software companies.

While HMRC cannot recommend one software product or service over another, participants said they would have benefitted from more guidance around the different types of software options available, including between full and bridging software.

The research states that clearly explaining the differences between types of software and the different features available may encourage businesses to think about what they might find useful and how they could benefit from the change. 

Some users expressed frustration about the lack of pricing information and the complexity of pricing models for available products, while others reported they had looked at options listed as free-to-use, which then turned out to have hidden costs.

Lack of switching

The research states that switching software was “very uncommon” among respondents, who for the most part stated that choosing MTD-compatible software was low on their list of business priorities.

Participants were typically willing to stay with a “less satisfactory, more expensive option” to avoid time and effort researching, trialling or using an alternative. 

Few participants actively switched software options as a result of MTD VAT legislation, and when this happened, it was typically due to poor ease of use of their existing package’s solution, or a lack of the full software functionality needed by more financially complex businesses. Less financially complex participants reported that if they did move, they traded down after initially choosing software with features beyond their needs. 

“Any previous experience I’ve had when you change software, it’s a real pain in the neck, and it’s not something you want to do unless there are huge benefits from it,” said one respondent from the food service industry. 

MTD ITSA perspectives

While the study predominantly focused on MTD VAT software adoption, it also pulled in participant perspectives on MTD ITSA – although the research was completed before the latest delay to the income tax stream of the MTD project.

The survey flagged low awareness of the introduction of MTD ITSA, with only accounting professionals or business owners informed by their tax agent aware of the upcoming changes.

Participant feedback ranged from viewing the changes as an almost inevitable next step in the digitisation of the tax system, to “shock and displeasure” at the news. Participants expressed concern that MTD ITSA would lead to greater complexity and further costs for them.

Most did not plan to research or adopt software yet, waiting for further information about the change. Those who currently paid an agent to handle their ITSA affairs tended to see the shift to MTD as the agent’s issue to deal with rather than their own. 

The full study is available here: Research to explore the customer decision-making process of choosing compatible software for Making Tax Digital.

Replies (35)

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By Self-Employed and Happy
15th Mar 2023 10:27

A lot of these businesses sound like they need an accountant advising and guiding.

Forget MTD ITSA for a second (which all my clients have been warned about) there should be no businesses out there that are in the cold about MTD, if we forget for a second the "tax gap" reasoning for introducing it (which is rubbish) then they should know about it from their accountant who should be pushing them into a direction which fulfills their compliance needs whilst explaining why it has to be done "this way" etc

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Replying to Self-Employed and Happy:
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By Southwestbeancounter
15th Mar 2023 14:39

I think it is more a question of why specifically do we have to do it the MTD way, other than that is just the way HMRC have decided it now has to be done!

I said at the outset I could not see MTD being effectively used as a tool to close the tax gap as that was due to other forces, and I still cannot see the point of it all these years later!

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Replying to Southwestbeancounter:
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By johnjenkins
15th Mar 2023 14:48

MTD is a con. You can always tell a con cos they hit you with the thing you want to hear first. Osborn stood up and said "We will do away with the Tax Return" " The UK will have the most advanced tax system in the world". You all know the rest.

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Replying to johnjenkins:
Morph
By kevinringer
15th Mar 2023 14:59

Why do politicians always say we're going to have the best in the world, and end up delivering something not fit for purpose. Boris kept on making similar promises during Covid. I'd prefer it if politicians focused on making a tax system that worked, even if it wasn't the best in the world.

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By johnjenkins
15th Mar 2023 10:28

Tom, MTD ITSA is never going to happen in its present form. There is no possible way that small business will rise to the challenge of QU. Everything HMRC has put forward has been shown to be wrong and unsubstantiated. So, although all my clients are digitised in some way shape or form that is not due to MTD, it is due to natural progression. QU, you gotta be joking.

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By Mr J Andrews
15th Mar 2023 10:58

If enough articles are written about this modern day South Sea Bubble, some people may start to believe it will actually happen.
Has anyone benefitted from such costly research commissioned / conducted on behalf of HMRC apart from the researchers - Kantar Public ?
And if the views in the { researcher's} report are their own and not necessarily those of HMRC , what was the bloody point of conducting the research ?
Bring on the next MTD article

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By Mr J Andrews
15th Mar 2023 10:58

If enough articles are written about this modern day South Sea Bubble, some people may start to believe it will actually happen.
Has anyone benefitted from such costly research commissioned / conducted on behalf of HMRC apart from the researchers - Kantar Public ?
And if the views in the { researcher's} report are their own and not necessarily those of HMRC , what was the bloody point of conducting the research ?
Bring on the next MTD article

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By mikejlee
15th Mar 2023 11:20

What is QU meant to mean?

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Replying to mikejlee:
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By johnjenkins
15th Mar 2023 14:10

Quarterly Updates

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By BryanS1958
15th Mar 2023 11:23

"Research consistently highlighted their confusion about the purpose, meaning and implications of MTD".

No sh*t Sherlock, even accountants are confused about the purpose of MTD.

There certainly does not seem to be any benefit for the vast majority of taxpayers, and there will certainly be a lot of monetary and administrative costs.

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By unclejoe
15th Mar 2023 11:48

We do all our accounts on spreadsheet, and I was initially very apprehensive about MTD VAT. But thanks to the kind person on here that introduced me to "100pc VAT free Bridge", I had no problems whatsoever. In fact the system probably does save me 20 minutes per filing quarter as it automatically logs me into HMRC and I don't have to manually input anything.

But I do strongly suspect that the rollout to main accounts submission may be very different. I hope I will be pleasantly surprised.

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Replying to unclejoe:
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By johnjenkins
15th Mar 2023 14:13

Perhaps if the "old" VAT system was upgraded and saved you 20 minutes there would have been no need for empteen M spent on MTD.

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By Marlinman
15th Mar 2023 12:22

I'm still hoping mtd will be scrapped. There's no way some of my clients will be able to handle it

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By Marlinman
15th Mar 2023 12:22

I'm still hoping mtd will be scrapped. There's no way some of my clients will be able to handle it

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By Charlie Carne
15th Mar 2023 12:49

The lack of awareness of the purpose of MTD is indicative of HMRC's poor handling of the entire project. I was at lunch with four colleagues last week who all disagreed with (and, indeed, laughed at) my embrace of MTD ITSA, arguing that it was pointless, as they believe that the data submitted will be onerous to collect four times a year, especially if it is to be accurate. No doubt, most readers of this post will agree with my lunchtime companions.

I have long argued that the purpose of MTD in the short term is not about getting data (or paying tax) to HMRC earlier, nor is it really about filling the 'tax gap'. It is simply (IMO) about a slow, first step to a digitally adopted future, where all transactions will eventually be able to be checked automatically by algorithms and even AI. I suspect that HMRC looked at the digital e-Tax system in Estonia and said "we'll have some of that".

There will be no advantages in these early steps towards MTD, other than a recognition that every journey begins with a single step. But MTD for ITSA need not be the huge burden that many in our profession fear. Firstly, HMRC have sensibly (if belatedly) raised the initial threshold to £50,000 (though I still think that a threshold of £85k would have been better, as those businesses will already be in MTD for VAT and would thus make easier guinea pigs to test the system for the first couple of years and iron out the kinks). By segmenting our clients, we can focus at the start on those whose turnover falls between £50k and £85k and, for those at the lower end of that range, we need merely connect their banks to simple MTD-compliant systems like Coconut or CountingUp.

Now, here is the contentious point that distinguishes my view from many in the profession. Once you've set them up, you don't need to do much each quarter when filing the MTD ITSA return because the purpose of the quarterly filing is NOT to submit accurate data to HMRC, but only to prove to HMRC that you are using a digitally compliant system. If my small client has connected his bank to Coconut and Coconut files something (anything) with HMRC once a quarter, they will be compliant with the new MTD for ITSA rules. I spoke to Jim Harra and Giles McCallum of HMRC 18 months ago at the AccountingWEB Expo and they confirmed that filing an inaccurate return on time would be compliant, whilst filing a totally accurate return 5 minutes late would not be. This sounds insane until you remember that no tax is due that is based on these in-year filings and, therefore, accuracy is not important until you file the end-of-year statement (which must be accurate as it replaces the current ITSA return).

Once you accept that digitalisation (and not accuracy of data filed until the end of the year) is the purpose, it is easy to understand why HMRC will seek regular, in-year proof of compliance, because that is the only way to ensure that businesses are taking those first steps towards a future when they will, eventually, be keeping their data accurately every month or week or even every day. If we only filed a digital report once a year, that offers no hint that the business itself is keeping digital data, as most would continue their manual processes in-year and only hand over to their accountant annually (as now) who would then prepare the data and file from compliant software. But asking the business to digitally 'shake hands' with HMRC a few times a year offers more reassurance that the data is being kept in a compliant system all year and not just after the year is over. It's not perfect (in fact, it's nowhere near) but it doesn't need to be as a first step. They could ask for this digital 'proof' daily or weekly, but quarterly seems a reasonable compromise.

So HMRC need to use the next three years until April 2026 to re-focus their marketing to explain this long-term goal and stop telling us that it will close the tax gap or allow clients to estimate their tax lability early or other nonsense that we know is not true.

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Replying to charliecarne:
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By AndrewV12
15th Mar 2023 13:12

Ten out of ten for effort.

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Replying to charliecarne:
Tornado
By Tornado
15th Mar 2023 13:21

It is easy for you to say, but many people simply do not understand what MTD is about and never will, as this report clearly shows and which most of us already knew.

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Replying to Tornado:
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By Open all hours
15th Mar 2023 14:53

Not sure that HMRC have a particularly clear view so there’s no hope for the rest of us.
They’ve been all over the place patching the The Emperors new clothes.

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Replying to charliecarne:
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By Hugo Fair
15th Mar 2023 13:29

I concur with the statement: "they confirmed that filing an inaccurate return on time would be compliant, whilst filing a totally accurate return 5 minutes late would not be" ... and that this is the sole real purpose (over the next decade) of MTD.

Unfortunately this knocks all the claims of 'benefits' for the taxpayer into the proverbial cocked hat ... leaving HMRC exposed not just as poor communicators but as outright liars who try to manipulate & coerce their 'customers'!

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Replying to charliecarne:
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By johnjenkins
15th Mar 2023 14:26

I hate to say this Charlie but I totally agree with you, except for the fact that............. let's say the whole idea of MTD is to tag each transaction and so contra off tags so that HMRC can see that every business is claiming what it should. OK next step is to make every transaction on RTI. For most business this would be easy to achieve. All purchases and most overheads are bought from shops, warehouses, garages etc. whose tills are digital, and no doubt "in the cloud" as opposed to "standalone".
Yes lots of holes but a far better starting point that HMRC have come up with and lied about.

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Replying to johnjenkins:
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By Self-Employed and Happy
15th Mar 2023 15:27

This type of tagging idea has almost already started, you can get suppliers to automatically send sales invoices into someones cloud accounting system.

100% this will lead to tagging of every sales / purchase invoice between companies.

Credit Reference agencies already can be linked to internal CRM therefore it's only a matter of time before they can be linked to Quickbooks (for example) and can give a live feed of what a company owes / is owed whilst cross referencing and giving a live credit score for all linked companies.

This automation will lead more and more to bookkeepers being pushed out and accountants having to think where they can add value, 20 years or so left for us in the profession (want to retire just before 60) so a decent amount of thought needs to be put into where this is all going and what use we will be later down the line.

I can 100% see why people chucked a retirement note in early.

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Replying to Self-Employed and Happy:
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By johnjenkins
15th Mar 2023 15:53

Taking that a stage further. All profits worked out automatically, taxes paid automatically. Why the need for MTD or even HMRC. No HMRC, no Accountants. Any probs call in "chatbox". Scary.

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Replying to charliecarne:
By ireallyshouldknowthisbut
15th Mar 2023 17:48

charliecarne wrote:

Now, here is the contentious point that distinguishes my view from many in the profession. Once you've set them up, you don't need to do much each quarter when filing the MTD ITSA return because the purpose of the quarterly filing is NOT to submit accurate data to HMRC, but only to prove to HMRC that you are using a digitally compliant system.

Whilst that *was* the original reason, it seems it has then moved into the realms of all sorts of corrections to the quarterly data, which is then quite frankly 4 year ends all fully posted to the ledger vs one. This seems to be the point they got to as otherwise the filing is just junk data. If its just junk data, we can quite frankly file any old tosh, and I most certainly will if we can. So actually the test wont be met by 'proving you are using digital systems' as all you will be doing is making it *look* like you are using digital system, whilst in reality running your business as you see fit, and pressing "send" on what might be a completely different set of data to your actual business. Ie "MTD books" which could be held by 3rd party to keep your compliant and 'tick the box' every quarter and "real books". the only way to stop that is to enforce real data. If you enforce real data, and corrections of it, the task is very onerous for many small business.

Of course for business who benefit from digital accounts (like my own, albeit not a sole trader) then no biggie. However my wife's BTL I am stuffed if I am doing that in software as I do it in about 20 minutes annually on excel.

All in all, nice idea, fails on a practical sense as not all business owners want or need digital records.

HMRC survey I think is actually quite decent, and reflects quite well my experiences of talking to clients about record keeping over the years. Some are really into it, most just want it done, and some don't want to know. Moreover the sample there is self selecting, the ones who really hate software probably would also hate doing that survey as they are not interested in officialdom and paperwork.

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Replying to ireallyshouldknowthisbut:
By Charlie Carne
17th Mar 2023 11:36

ireallyshouldknowthisbut wrote:

all you will be doing is making it *look* like you are using digital system, whilst in reality running your business as you see fit, and pressing "send" on what might be a completely different set of data to your actual business.

Except that this would not be compliant. There needs to be some attempt to file real data, even if it's not complete. If HMRC inspect the records and see that it's a "completely different set of data", then the business will suffer a penalty for non-compliance.

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Replying to charliecarne:
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By johnjenkins
17th Mar 2023 13:07

"If HMRC inspect the records" That's an if that will stay an if.

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By AndrewV12
15th Mar 2023 13:11

I have said it before and I will say it again, I thought under Brexit red tape and bureaucracy would be swiped aside, MTD ticks all the boxes of red tape and pointless bureaucracy.

Its got to go now, even if only to comply with Brexit guidelines of the way ahead.

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Morph
By kevinringer
15th Mar 2023 14:47

The trouble with the choice of MTD software is that it is overwhelming and once you've made your choice, it is extremely time consuming to switch. HMRC seem to think switching is easy, as if it is as easy as switching domestic power supplier, but it takes HMRC decades to switch: they've only just retired their VAT mainframe. The vast majority of my clients are using spreadsheets and bridging software for MTD VAT. Whilst these clients might just be able to put together a software for listing VAT transactions and linking that to bridging software, none have the ability to build a spreadsheet sophisticated enough to handle MTD ITSA. I wonder if I have the ability to build one that could handle everything MTD ITSA requires. What this means is that any research HMRC conducts into MTD VAT will not give any meaningful information as far as MTD ITSA is concerned. HMRC could obtain meaningful information by listening to accountants. Way back in 2015 we were telling HMRC information that HMRC is only now finding out from other sources. It would have saved HMRC a lot of time and resources if HMRC had listened to us in 2015. HMRC could still save themselves time and resources if they listened to us today.

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Replying to kevinringer:
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By Open all hours
15th Mar 2023 14:58

Yes guys, 2015. What did you do in your practice that you’re still trying to make work, 8 years on?

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By GHarr497688
15th Mar 2023 15:44

I have one clients who signed up to MTD VAT. They currently write up the VAT in a manual book then have the onerous task of entering all the data onto a computer. The process is a complete waste of time. With MTD ITSA they decided to retire if this was introduced in 2024. Quite strange that Government say that they want older people to carrying on work whilst introducing a process no one want just to fulfil a pledge back in 2015. Why don't they looked at the results of the survey and scarp the requirement to keep on records on a computer. I would imagine some accounting records are on complete shambles using MTD VAT.

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By moneymanager
15th Mar 2023 16:50

The first stumbling block is that HMRC can't correctly identify which services are REALLY free as opposed to those which are merely "freeish"

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By DMBAcc
21st Mar 2023 10:29

Thank you Tom for this information. I am an unashamed advocate for the small/micro sole trader business. I had thought, initially, that any individual with total turnover of less than £30,000 would now be exempt from MTD. Someone on this page has suggested it is now £50,000 - perhaps you can clarify. IF HMRC had said at the outset this will only apply to those with turnover of over £30,000 I would have probably not bothered with anything that has happened to MTD since 2016. What incensed me and many others was that the threshold was originally set at £10,000 and could include geriatric owners of a small cottage with income of just a few thousand pounds being drawn into this system. Talk about using a sledgehammer to crack a nut. All we ever wanted was some SENSIBLE discussion with HMRC on what EXACTLY they wanted. It is clear to me from your report that it now transpires that HMRC never really had a clue what they wanted or why. I used to work for Hampshire Councty Council and can remember in the early 1980s the then County Treasurer proclaiming that we would soon have paperless offices. 40 years later I am still waiting. Maybe if we give it another 40 years (when I am long gone) his optimism will be realised. Thank you again for this summary.

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Replying to DMBAcc:
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By Hugo Fair
21st Mar 2023 18:06

"I had thought, initially, that any individual with total turnover of less than £30,000 would now be exempt from MTD. Someone on this page has suggested it is now £50,000 - perhaps you can clarify."

MTD ITSA for unincorporated businesses, self-employed individuals and landlords - the Government has announced a revised/phased introduction as follows:
* starting in April 2026 (previously April 2024) BUT with an increase in the gross income threshold (from £10,000) to £50,000;
* with that income threshold reducing to £30,000 from April 2027.

A review of "the needs of smaller businesses" is supposedly underway (so they may not yet be secure from mandation a year or so later).
And there is as yet no announcement regarding mandation of MTD for ITSA for general partnerships (previously due to come into force from April 2025).

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Replying to Hugo Fair:
Tornado
By Tornado
21st Mar 2023 18:25

In the Budget 2023 Costings for 'Making tax digital for income tax self assessment and digital prompts : phased implementation from 2026"

It does say that -

ITSA self-employed individuals and landlords with income between £10,000 and £30,000 who are classed as non-partnerships were previously mandated to join MTD from April 2024, and ITSA partnerships with income above £10,000 from April 2025. These groups are no longer mandated to join MTD

I read this as being a decision not to mandate those with incomes up to £30,000 at all along with all SA partnerships and companies with incomes of any size.

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Replying to Tornado:
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By Hugo Fair
21st Mar 2023 19:12

I'd be happy to share your optimism (if only as evidence of a rare outbreak of common-sense within HMT), but I fear the wording was carefully chosen to be non-committal with regard to the future.

NOTE: your quoted extract contains two facts that were true *before* the Budget announcements:
1. A subset of those who "were previously mandated to join MTD" - as per original legislation;
2. Those subsets "no longer (being) mandated to join MTD" - because they were not included in the revised legislation put forward to-date.

So, the Budget announcement didn't actually change the previous 'promise' to review the options for those groups ... indeed they've already opened a 'consultation' into the under £30k group, so plus ça change (so far).

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Replying to Hugo Fair:
Tornado
By Tornado
21st Mar 2023 19:33

OK I see what you mean.

Presumably the associated costings are still based on the under £30,000 group not being mandated.

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