The National Audit Office (NAO) found that HMRC’s costs of administering the tax system increased by £563m in real terms between 2019/20 and 2023/24, with tax revenue rising at a similar rate.
The spending watchdog also calculated that businesses have paid an estimated £15.4bn to comply with the tax system – but this is likely to be an understatement, and there is no equivalent estimate for individuals.
The NAO also calculated that upgrading HMRC’s digital systems cost £482m in 2023/24, but the process has taken longer and cost more than expected.
Why have costs risen?
The increase in administrative costs can be attributed to several factors. Firstly, the tax system is becoming increasingly complex. HMRC has estimated that the combined effect of changes announced between 2022 and 2024 will increase its costs cumulatively by about £875m over the next few years.
However, none of these changes are expected to reduce costs, although it is anticipated that some of them will increase revenue in the longer term.
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Secondly, the number of people liable to pay income tax has increased from 31.7 million in 2020/21 to 36.2 million in 2023/24, due to income tax thresholds remaining at the same level since April 2022, and population and employment growth.
Thirdly, the cost of compliance work – which helps to reduce fraud and error in the tax system – has increased due to higher spending on digital tools and staff.
These costs reflect a broader trend across HMRC, whereby it has invested heavily in recruiting higher-skilled staff and digitalising its systems.
A greater number of senior staff in HMRC’s workforce added more than £100m to salary costs between 2019/20 and 2023/24. In addition, the cost of running HMRC’s digital tax systems amounted to £785m in 2023/24 – an 18% increase in real terms from 2019/20.
Burden on businesses
The NAO also found there is a significant cost burden on businesses to comply with tax rules – but it said HMRC’s estimate of £15.4bn annually is likely to be an understatement.
The watchdog noted that published assessments of the impact of tax policy changes rarely estimate the costs for businesses and individuals.
Although HMRC’s customer service costs have been broadly stable – accounting for 29% of total tax collection costs in 2023/24 – the cost to serve each taxpayer has risen for some large taxes amid poor levels of service.
Some taxpayers and their representatives are finding it more difficult to deal with their tax matters, leading to some loss of trust in HMRC.
Recommendations
The NAO recommends that HMRC takes a ‘holistic view’ of the cost effectiveness of the tax system. It said it needs to clarify estimated costs and benefits when placing increased requirements on taxpayers and, where appropriate, spend more when this reduces the overall cost of the system.
The watchdog also said HMRC should commit to reducing administrative cost burdens on taxpayers.
Gareth Davies, head of the NAO, said: “Businesses and individuals deserve a modern, resilient and effective tax system to help them get their tax right first time.
“To get the most out of the money it spends on collecting taxes, HMRC must better understand how changes to the system affect the costs it incurs in administering taxes, as well as the financial burden on individuals and businesses. HMRC must also ensure the end-to-end system is working well for each tax.”
