Digital services at HM Revenue and Customs are not serving all customers well and are costly to run on a day-to-day basis, according to the central government auditor.
The National Audit Office (NAO) has published a report on the department stating that an increasingly complex tax system has been raising administration costs with revenues increasing at a similar rate.
Among the key issues has been that the introduction of major digital programmes and systems such as Making Tax Digital and Real Time Information has increased revenue for HMRC, but for taxpayers the picture is mixed. The report says that some, and their representatives, are finding it more difficult to deal with the department.
Most stakeholders have said they would like new digital systems if they are well designed, but that those in place may not account for people with complex tax affairs and problems are not addressed promptly.
The issue is complicated by challenges in producing a single solution that will work for large businesses with tax and accountancy experts and for smaller companies that may not prioritise tax issues until there is a problem, the report says.
Challenges in upgrades
Other problems have arisen from the process of upgrading digital systems, on which £482 million was spent in 2023-24, has taken longer and cost more than expected. The report says HMRC has one of the most complex IT estates in the UK and faces significant challenges in modernising its infrastructure.
Its Securing our Technical Future programme was intended to stabilise its IT estate by migrating services to modern platforms, but its scope was reduced by financial constraints, which in turn has reduced the benefits.
In addition, although there is evidence that while digitalisation has increased revenue it has also increased running costs, with the department spending £785 million running its digital tax systems in 2023-24, up by 18% in real terms from 2019-20.
HMRC does not track how much of its digital costs are incurred from maintaining and updating legacy systems, the report says.
Further complications
On a wider front, the report says that an increasingly complex tax system, recruitment of more highly skilled staff and compliance with tax rules have contributed to rising costs in real terms over the past five years. Against this, they have helped to increase revenues.
There was a 16% real terms increase in tax revenue between 2019-20 and 2023-24, equivalent to £113 billion, along with a 15% increase in collecting tax, equivalent to £563 million.
The NAO recommends that HMRC takes a holistic view of the cost effectiveness of the tax system, clarifying estimated costs and benefits when placing increased requirements on taxpayers and, where appropriate, spending more when this reduces the overall cost of the system.
It should also commit to: reducing administrative cost burdens on customers; develop better efficiency and productivity measures; and gain a clearer understanding of the costs and benefits of activities that stop non-compliance from occurring in the first place.
Do better for businesses and individuals
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.”
