HMRC’s challenges in administering the tax system, as it has become increasingly complex, have been revealed in Parliament’s Public Accounts Committee (PAC) report, with trust in the agency falling, and costs rising significantly. The simplification of taxation has been emphasised by PAC as a way of improving trust with taxpayers and learning lessons from the implementation of Making Tax Digital (MTD).
Caroline Miskin, Senior Technical Manager – Digital Taxation, at ICAEW, says: “It is no surprise that the cost of complying with tax obligations is increasing, as each year more is asked of HMRC, taxpayers and agents. It has been clear for some time that HMRC has been struggling to meet the additional demands placed on it, contributing to a decline in customer service that appears to be eroding trust in the tax system.
“It is vital that the impacts of administering and complying with changes in tax policy, including changes to HMRC systems, are given serious thought at an early stage in the process. More needs to be done to simplify the tax system, not just tax administration. It is disappointing that the government appears to be only interested in the latter. MTD demonstrates the importance of consulting with and listening to taxpayers and agents. Our members tell us – and we have told HMRC and government – that quarterly reporting will increase costs for little obvious benefit, and the PAC report supports this.”
What are the challenges?
PAC has made several recommendations, to help HMRC deal with the challenges it has identified. A primary one is that tax has become more costly to administer. The total cost per year is estimated at more than £20 billion, with much of that cost falling on businesses. This is largely due to the additional policies announced, with 240 tax policy changes announced between 2022 and 2024 alone.
In the 2023/24 tax year, HMRC spent £4.3 billion on administration, up by 15% – equivalent to £563m in real terms – compared to 2019/20. This was the driving force behind the Government introducing a range of simplification measures.
HMRC’s compliance productivity has also fallen, despite hiring more senior staff. In 2023/24, the compliance return for each worker for HMRC was £1.27m. This is down from £1.4m per worker before the pandemic, when inflation is taken into account. PAC has asked HMRC to outline how it will improve these figures to increase productivity again.
Taxpayers have lost trust in HMRC
Perhaps the biggest problem is that large businesses, small businesses, individual taxpayers and their agents have all lost trust in HMRC. Figures show that between 2021 and 2023, trust in HMRC fell from 52% to 47% for individuals, and from 61% to 49% for agents, according to the ICAEW.
PAC is encouraging HMRC to find out why there has been such a fall in trust. But perhaps part of the problem is the difficulties HMRC has faced with its IT systems. Work to replace legacy systems is costing more and taking longer than expected. The legacy systems mean it isn’t possible to use the full benefits of AI, which HMRC has already admitted is making it lag behind other organisations when it comes to communicating with taxpayers and agents digitally. Leveraging AI would help to improve efficiency and boost the customer experience.
The other major challenge is that despite the amount of time and effort that has gone into Making Tax Digital, there is little proof of productivity improvements for VAT traders, as it “is imposing additional administrative costs on taxpayers”, even though it is also generating additional VAT revenue. The estimated cost of implementing MTD back in February 2024 was £500m, with ongoing net costs of £200m a year thanks to the introduction of MTD income tax.
