HMRC face rising costs and falling trust, warns Public Accounts Committee

The PAC’s report, “Cost of the tax system”, urges HMRC to lay out “realistic plans to simplify the tax system and address taxpayers’ concerns”, as its costs rise and trust in it falls.

Publishing the report, Sir Geoffrey Clifton-Brown MP, Chair of the Committee, labelled the tax authority “a lumbering dinosaur” and suggested that HMRC needs to “do much more to restore trust and confidence” in its taxpaying consumers. He added: “It is time for HMRC to prioritise modernising its own systems so that it is fit to enter the second quarter of the 21st century. The potential for new technologies such as AI to augment HMRC’s efforts to tackle these issues is clear, and HMRC must move at pace to seize the opportunities it presents.”

The committee has made six recommendations to HMRC based on their findings, summarised below:

Restoring taxpayers’ trust in HMRC

Trust in HMRC has fallen among all taxpayer groups since 2020, despite trust being considered “vital for a tax authority to effectively discharge its role, including the willingness of taxpayers to pay the correct amount of tax on time”. Lower service levels have impacted perceptions; for example, only 38% of agents found it easy to deal with HMRC in 2023, down from 50% in 2019.

PAC Recommendations: a) HMRC should work with taxpayers and their representatives to understand why trust in HMRC is falling and what it can do to quickly address the decline. b) HMRC should publish the concerns it has heard and the actions it is taking to address these, as a first step to improving trust

Learning lessons from Making Tax Digital (MTD)

The PAC states that: “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.” MTD imposed an estimated £300 million in net costs on VAT traders from 2019–24. 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 which will exceed their ongoing savings by around £200 million each year. The report claims, “there is no strong evidence to date to suggest productivity improvements or other benefits for most VAT traders following the introduction of MTD”.

PAC Recommendation: HMRC should research customer needs thoroughly and design systems accordingly, with evidence included in business cases and public documents, including Tax Information and Impact Notes.

Rising cost of tax administration

The cost of administering taxes is increasing for HMRC and taxpayers. HMRC’s tax collection costs rose by £563 million (15%) in real terms from 2019–20 to 2023–24, with costs per taxpayer also increasing across major tax types. While tax revenues rose at a similar rate, driven by economic and policy factors, the system has grown more complex, with 240 tax policy changes between 2022 and 2024, costing HMRC and businesses £875 million and £913 million respectively.

PAC Recommendation: HMRC should publish realistic tax simplification plans and establish robust metrics for reporting the impact on its costs and on taxpayers’ costs in its annual reports. The plans should explain how HMRC have identified areas of most concern to taxpayers and how they will address these.

Replacing outdated IT systems

The PAC concludes that HMRC have allowed many of their IT systems for administering tax and interacting with customers to become out of date. “Spending Review 2020 enabled HMRC to spend more on its IT estate, but progress in remediation is costing more and taking HMRC longer than expected, with some funding being reallocated to other priorities in 2023–24”. 69% of HMRC interactions were digital in 2023/24, but postal communication remains too heavily used, adding cost and reducing efficiency. Improving its digital systems, and supporting more customers to use them, would help HMRC reduce calls to its helplines.

PAC Recommendations: Within three months of the Spending Review, HMRC should outline a remediation timetable, costs, and savings. It should also explain how and when it will cut ‘unnecessary’ postal and phone communications and estimate savings.

Taking advantage of new technology

The PAC concludes that HMRC is not well-placed to benefit from technologies like AI and e-invoicing due to legacy systems limiting data access and increasing vulnerability. HMRC have been ‘slower’ than some other tax authorities in adopting pre-population of tax returns and e-invoicing.

PAC 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.

Declining compliance productivity

Despite investment in digital systems and higher-skilled staff, compliance productivity has decreased from over £1.4 million per worker pre-COVID to £1.27 million in 2023–24. Staffing changes added £100 million in salary costs over the period 2019–20 to 2023–24. HMRC considers that raising the average return across all its compliance staff is difficult, but it acknowledges that it needs to return productivity to the levels its experienced staff previously achieved

PAC Recommendation: HMRC should explain the steps it will take to return compliance productivity to pre–pandemic levels as soon as possible and seek year–on–year improvements thereafter.

Responding to the PAC report, a spokesperson for HMRC said: “It costs HMRC just half a penny to collect every pound of tax revenue and the National Audit Office has said our compliance work provides good value for money. As part of the government's plan for change, we're investing to modernise and reform the tax system, determined to reduce costs and the tax gap as we improve our compliance and customer services further.”

CIOT Director of Public Policy, Ellen Milner, commented: “As the PAC observes, in its early stages, Making Tax Digital (MTD) was imposed on businesses without adequate consultation. The forthcoming Digital Transformation Roadmap provides a golden opportunity to plan out how HMRC arrives at a ‘digital first’ destination, but to be fully effective the roadmap needs to be co-created with stakeholders, learning lessons from the implementation of MTD.”

Further reading: PAC report