Meeting tax obligations is costing UK firms around £15.4 billion a year according to the National Audit Office (NAO), the body responsible for scrutinising public spending, and it appears HMRC is underestimating these costs to taxpayers. This has a major impact on the profitability of UK businesses, especially during a period when Chancellor Rachel Reeves is focusing on ways to grow the UK economy.
In its latest report, The administrative cost of the tax system, the NAO is looking to make the costs of administering taxes more visible to all parties, to explore whether HMRC understands whether its administrative costs are high and/or increasing, and to establish how HMRC is working to reduce costs to taxpayers by improving efficiency and productivity. The NAO focused on the four taxes which create the highest revenues but also have the highest administrative costs. These are:
- Income tax.
- National Insurance Contributions.
- VAT
- Corporation tax
Frank Haskew, Head of Taxation, ICAEW, said: “This report highlights how the UK’s increasingly complicated tax system is saddling businesses and HMRC with extra burdens and costs, which are growing in real terms. The report also substantiates our concern that the cost to businesses of complying with their tax obligations is likely to be understated.”
What is the impact of these costs?
The NAO report highlights that compliant businesses are spending £6.6 billion in fees to agents, accountants and other intermediaries, £4.5 billion on items such as software to help them comply with HMRC rules, and around £4.3 billion on internal costs, such as hiring staff to do administrative work. Given there are 2,500 obligations across 27 policy areas, it is little wonder the costs are so high.
However, the NAO doesn’t believe that even these extraordinary figures show the complete picture, as it feels this underestimates the amount that businesses need to pay to comply with so many complex rules within the UK tax system. The figures don’t, for example, take into account all taxpayer obligations. And although HMRC has uprated these costs from research carried out in 2015 – but not since – into how much time businesses spend on tax administration, it hasn’t taken into account wider tax system changes made in the last decade.
However, the assessments of how tax policy changes impact taxpayers rarely estimate the costs of compliance for both businesses and individuals, the ICAEW said. Despite this, estimates show that HMRC is spending 15% more – or £563m in real terms – between 2019/20 and 2023/24 for administering the tax system. What this means is that HMRC spends an average of 0.51p for every £1 collected.
The cost to collect different taxes
The thing is, not every type of tax costs the same to collect. For example, income tax self-assessment (ITSA) was the most expensive to collect in 2023/24, at 2.14p per £1 collected. This is six times the amount it costs to collect income tax through PAYE.
Other costs are outlined in the table below:
| Tax type | Cost (£bn) | Revenue collected (£bn) | Cost of collection 2023/24 (pence per £1 collected) |
| Income Tax Self-Assessment | 1.06 | 49.4 | 2.14 |
| Income tax PAYE | 0.78 | 236.8 | 0.33 |
| VAT | 0.91 | 155.7 | 0.58 |
| Corporation tax | 0.50 | 89.5 | 0.55 |
| National Insurance Contributions | 0.23 | 177.0 | 0.13 |
Source: NAO analysis of HMRC data
Mr Haskew said: “If government is to make decisions around tax policy that properly takes into account the costs and burdens placed on businesses and HMRC, improved numerical analysis and statistics will be required across the board. A key first step would be a thorough review and update of HMRC’s standard model of the costs incurred by businesses when changes are made, which is now at least 10 years out of date.”
We can help you meet your obligations
If you are a Sole Trader, Limited Company or SME and want to know how you can reduce the costs associated with your compliance with HMRC requirements, then please get in touch and we would be happy to give you the guidance you need.
