Following a six month-long consultation, HMRC announced on Tuesday its MTD plan will launch next year, despite calls by MPs for a delay to avoid a potential "disaster".
The Revenue said that transitional costs will average around £280 per business between 2017 and 2021.
HMRC estimated the one-off transitional costs will be £100m for UK businesses in 2017/2018, rising to £500m in 2018/19 and falling the following year to £350m.
In total, transitional costs between 2017 and 2021 will be £980m.
Earlier this month, MPs in the Treasury Committee called on the government to delay the digitisation plans until at least 2019/20, warning the “collateral damage” of its implementation "could be large” and could undermine the government’s objectives.
However, the Revenue said that most businesses, self-employed people and landlords will start to keep track of their tax affairs digitally and update HMRC quarterly from 2018.
Meanwhile, MTD will be deferred until 2020 for partnerships with a turnover above £1m.
HMRC said that the government will need to consider further issues, such as the initial exemption threshold and deferring the changes for some small businesses.
“Given the range of views expressed on this matter from respondents to the consultation, the government will take more time to consider these issues alongside the fiscal impacts. Final decisions will be made before legislation is laid later this year,” the announcement said.
After 3,000 responses to its consultation, HMRC decided that businesses will now be able to continue to use spreadsheets for record keeping. However, they must ensure that their spreadsheet meets the necessary requirements of MTD, which means they might need to combine the spreadsheet with software.
It also announced that businesses eligible for three line accounts will be able to submit a quarterly update with only three lines of data, and free software will be available to businesses with the most straightforward affairs.
HMRC said that the requirement to keep digital records does not mean that businesses have to make and store invoices and receipts digitally, and activity at the end of the year must now be concluded and sent either by ten months after the last day of the period of account or 31 January. Charities, but not their trading subsidiaries, will not need to keep digital records.
Frank Haskew, ICAEW’s head of tax, said the government is listening to the concerns of smaller businesses in the implementation of Making Tax Digital.
"In addition to making some helpful announcements, for example that spreadsheets will be allowed as part of digital record-keeping, the government is allowing more time for further consultation on the two major areas, namely what should be the exemption limit for smaller businesses and the implementation timescale involved – these are positive steps which we welcome"
He did raise concerns, however, that the government has given stakeholders "only four weeks to respond to the draft legislation as opposed to the usual 12 weeks."
"We trust that the government will continue to consider comments on these provisions and refine them as part of the Finance Bill and make changes as necessary. With so much additional legislation having been tabled in recent weeks, we expect this to be one of the longest ever Finance Bills and it needs time for thorough consultation.”
According to HMRC, MTD will help businesses steer clear of errors, by reducing the £8bn a year cost in tax.
Businesses and landlords with a turnover of less than £10,000 will not be obliged to produce quarterly reports or keep their records digitally.
Jim Harra, director general at HMRC’s customer strategy and tax design, said, “We know that the majority of businesses want to get their tax right first time, but the latest tax gap figures show that too many find this hard, with more than £8bn a year lost in tax as a result of avoidable taxpayer error by small businesses.
“Making Tax Digital will help businesses to get their tax right first time; it will help reduce the likelihood of errors, lower the chance of unwelcome compliance checks and give them greater certainty that they are getting things right.”
Harra added, “We are pleased that there was a broad welcome for the principle of Making Tax Digital and HMRC developing a transparent and accessible tax system fit for the digital age. The appetite for digital services is growing and traditional paper-based processes make no sense in the 21st century where the vast majority use digital services.”
Following the consultation, HMRC said that, in order to support customers during the transition, customers will be given a period of at least 12 months before they are charged any late submission penalties.
HMRC will begin piloting digital record keeping and quarterly updates for a full year from April 2017 with some businesses.