HM Revenue and Customs (HMRC) continues to face increasing costs and challenges as it presses on with becoming a fully digital tax authority, according to a National Audit Office (NAO) report.
The latest report into the tax system found that HMRC spent £785m on running its digital tax systems in 2023-24, accounting for an 18% cost increase in real terms from 2019-20. It also spent £482m on developing new systems and upgrading legacy systems, some of which are 30 years old. The NAO report said that three of its eight most costly tax-related digital programmes involved remediating legacy systems in 2023-24.
“By March 2023, these programmes had seen whole-life costs increase by between 60% and 390%, with their life extended by between 21 months and 36 months as their scope changed,” the report said.
One of these was the “securing our technical future” programme, which aimed to migrate the department’s critical IT services onto new platforms. However, the programme has closed and was found to underdeliver due to “unforeseen technical complexities”.
HMRC first began introducing digital services in 2015 through its Making Tax Digital programme. However, while some services are working well, and around 60% of transactions are now digital, it has not gone to plan.
The programme was originally due to be completed by 2020, but the department has continually rephased and moved the timeline, and is now looking at 2030 before completion. Costs are estimated at five times more than originally planned. Originally set at £226m, HMRC has spent more than £600m so far, and the estimated cost during the lifetime of the programme is more than £1.3bn.
“Investment in digitisation is a key plank of HMRC’s strategy for modernising the tax system. HMRC has one of the largest and most complex IT estates in the UK and, like other government departments, it faces a significant challenge to modernise its IT infrastructure to keep pace with changing technology,” said the NAO report.
“Digitisation is potentially the solution to the complexity of existing paper-based or legacy IT systems. The greater digitisation of taxes is at the centre of HMRC’s tax administration strategy. HMRC has bid for increased resources to accelerate its spending on remediating and modernising its IT estate and get to its target IT architecture by 2030.”
While the digital services currently in place tend to work well for straightforward transactions, more complex tax queries continue to face difficulties.
“Feedback from stakeholders is that most would like new digital systems, provided they are well designed, but that HMRC’s new systems may not account for people with complex tax affairs sufficiently and problems with the system are not addressed promptly. This has obvious implications for HMRC’s own cost base,” the NAO report said.
“HMRC faces challenges in producing a single solution for a wide customer base, from well-resourced large businesses with access to accountancy and tax experts, to small and medium-sized enterprises who may not prioritise tax issues until there is a problem.”
The forecast costs to VAT and Self-Assessment customers to comply with the new arrangements currently sit at around £1.5bn.
Commenting on the report, Public Accounts Committee chair Geoffrey Clifton-Brown called on HMTC to take the need to consider the financial burden on taxpayers seriously and improve efficiency and productivity.
“The costs of running the tax system are rising as the system has become increasingly complex and burdensome, and more people are having to pay tax as a result of frozen tax bands. Despite the promises of new digital systems, these programmes are overrunning, overbudget and failing to cut HMRC’s running costs,” he said.
“At the same time, public trust in HMRC is being eroded as taxpayers find it difficult to deal with HMRC. Continual failings in customer service cause frustration and heap additional costs onto taxpayers.”
The NAO report said that while digitisation has increased revenue, it does not seem to be reducing running costs, while “customer service performance has declined and efficiency targets have proved difficult to achieve without compromising services”.
It added that considering HMRC’s investment in more highly skilled staff and digital systems, higher returns should be achievable.
NAO head Gareth Davies said that businesses and individuals deserve a modern and effective tax system.
“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,” he said. “HMRC must also ensure the end-to-end system is working well for each tax.”
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