Parliament's Public Accounts Committee's (PAC) latest report, 'The cost of the tax system', again criticises HMRC's performance, warning that as tax collection costs rise, HMRC needs to put the customer first and be ready to adopt new technologies, including Artificial Intelligence (AI).
The latest PAC report calls for realistic plans to simplify the tax system and for HMRC to address the decline in trust taxpayers have in it.
Yet again, the Chair of the Committee, Sir Geoffrey Clifton-Brown MP, pulled no punches in his criticism of HMRC. "Customers at the moment are forced to engage with an authority that is frankly a lumbering dinosaur," he said.
Several facts stood out from the report:
- It now costs over £20 billion a year to administer tax, with most costs falling on businesses.
- In 2023–24, HMRC spent £4.3 billion on tax collection.
- The tax administration costs to businesses were estimated to be at least £15.4 billion. HMRC do not estimate the cost to individuals of administering tax.
- Compliance returns have declined from over £1.4 million per compliance worker before the COVID–19 pandemic, to £1.27 million per worker in 2023–24.
- 5,000 more staff will be recruited with a productivity level of £0.55 million per additional compliance worker.
- In 2021–22, HMRC recruited more senior staff to undertake compliance work, increasing the proportion of senior grades from 41% to 53% of staffing.
- This added over £100 million to HMRC’s salary costs while customer services decreased.
- There is no strong evidence to date to suggest productivity improvements for most VAT traders following the introduction of MTD. The Committee concluded that HMRC had lost sight of the need to put taxpayers at the heart of changes to the tax system.
- MTD was imposed without much consultation on businesses, and there was ignorance of future administrative costs.
- Making Tax Digital for VAT brought an additional net cost of £300m for businesses between 2019-20 and 2023-24.
- The future extension of MTD to Income Tax Self-Assessment is set to impose further transitional costs for some taxpayers, with the ongoing costs of MTD to exceed ongoing savings by around £200 million each year.
Conclusions and recommendations
Conclusion: The cost of administering taxes is increasing for HMRC and taxpayers.
- HMRC’s costs of tax collection increased by £563 million (15%) in real terms between 2019–20 and 2023–24.
- The tax system is getting more complex. There have been 240 tax policy changes announced in the years 2022 to 2024.
- The estimated net cost of these changes is £875 million to HMRC.
- The estimated net cost of these changes is £913 million to businesses.
Recommendation
- HMRC should publish realistic plans to simplify the tax system and establish robust metrics for reporting the impact on its costs and taxpayers’ costs in its annual reports. The plans should explain how HMRC has identified areas of most concern to taxpayers and how it will address these.
Conclusion: Taxpayers’ trust in HMRC is falling.
- The proportion of agents who reported finding it easy to deal with tax issues reduced from 50% in 2019 to 38% in 2023.
Recommendations
- HMRC should work with taxpayers and their representatives to understand why trust in HMRC is falling and what it can do to address the decline quickly.
- HMRC should publish the concerns that have been addressed to them and the actions HMRC are taking to address these, as a first step to improving trust.
Conclusion: HMRC’s compliance productivity has declined, despite its increased focus on prevention and investment in digital systems and higher–skilled staff.
- HMRC’s compliance work offers high returns and good value for money but its compliance returns have declined from over £1.4 million per compliance worker before the COVID–19 pandemic, to £1.27 million per worker in 2023–24.
- The decline has taken place despite HMRC investing in digital systems
- Focusing more on upstream compliance to prevent problems before they happen.
- Employing more higher–grade compliance staff. The government is providing HMRC with resources to recruit 5,000 additional staff to achieve £2.7 billion of additional tax revenue a year by 2029–30 (a productivity level of £0.55 million per additional compliance worker).
Recommendation
- HMRC should write to the Committee (PAC) alongside its Treasury Minute response, explaining the steps it will take to return compliance productivity to pre–pandemic levels as soon as possible and seek year–on–year improvements thereafter.
Conclusion: HMRC allowed many of its IT systems for administering tax and interacting with customers to become outdated, increasing both its costs and the burdens on taxpayers.
- Spending Review 2020 enabled HMRC to spend more on its IT estate. However, the progress in technology remediation is costing more and taking HMRC longer than expected, with some funding being reallocated to other priorities in 2023–24.
- HMRC have acknowledged that it trails other organisations in allowing secure communications for customers through digital channels.
- Too much of its communication with customers continues to be by post.
Recommendation
- Within three months of the spending review being published, HMRC should write to the Committee setting out its timetable for remediating its legacy IT systems, the forecast cost of investments and expected savings.
- HMRC should write to the Committee alongside its Treasury Minute response setting out how and when it will reduce unnecessary communication with customers by post and telephone.
Conclusion: It is of the utmost importance that HMRC learns lessons from its experience of implementing Making Tax Digital (MTD) and puts customer needs at the heart of plans to improve digital services.
- The previous PAC reported in 2023 that HMRC have lost sight of the need to put taxpayers at the heart of changes to the tax system. MTD was imposed on businesses without much consultation, and without businesses knowing what the administrative costs would be.
- HMRC estimate that MTD imposed net costs on VAT traders of around £300 million between 2019–20 and 2023–24.
- In February 2024, HMRC estimated that extending MTD to Income Tax Self Assessment will impose transitional costs of over £500 million on taxpayers, and will impose ongoing costs on taxpayers that would exceed their ongoing savings by around £200 million each year.
- There is no strong evidence to date to suggest productivity improvements or other benefits for most VAT traders following the introduction of MTD.
Recommendation
- HMRC should ensure there is sufficient research into customer needs and design digital programmes and systems that meet those needs. HMRC should evidence their assessment of customer needs.
Conclusion: The PAC was concerned that HMRC was not well–placed to take advantage of the opportunities offered by technology, for example, the development of Artificial Intelligence (AI) and e-invoicing.
- HMRC's legacy systems make them more vulnerable to the use of AI by bad actors.
Recommendation
- HMRC should write to the Committee alongside its Treasury Minute response, with an assessment of how well–placed it is to take advantage of new technology, including AI, and its plans and timetable for addressing the factors that constrain its capability and capacity to do so.
On a more optimistic note, the PAC noted that its past scrutiny of the Passport Office helped to swiftly and radically transform their digital services while maintaining security. "If it is possible for the Passport Office to achieve these outcomes, which handles just as much confidential information, then it will be possible for HMRC to learn the lessons and do the same.”
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External link
Committee of Public Accounts, The cost of the tax system, Twenty-Third Report of Session 2024–25