Image: 160402-UKGH16-101 by W N Bishop under Attribution-NonCommercial 2.0 Generic licence.
At a glance
- British businesses are spending a staggering £15.4 billion yearly to navigate the tax system, whilst HMRC’s administration costs have risen by 15% over the past four years.
- Trust in HMRC has plummeted across multiple sectors, with tax agents’ confidence falling most dramatically from 61% to 49% between 2021 and 2023.
- The implementation of Making Tax Digital for income tax self-assessment (MTD ITSA) accounts for 83% of the estimated £917 million in new tax policy implementation costs for businesses.
Business is spending billions of pounds to navigate the tax system, with HMRC called on to improve its efficiency, productivity, and service levels, a report has found.
The National Audit Office’s (NAO) ‘The administrative cost of the tax system’ report found that HMRC estimates it costs businesses £15.4bn annually to comply with the tax system. Of this figure, some £6.6bn is payments to agents, accountants, software developers and other intermediaries.
However, the NAO states that this is an understatement due to it not taking into account all taxpayer obligations.
HMRC’s costs to administer its systems rose by 15% between 2019/20 and 2023/24, a similar increase to that of tax revenues during the period. The NAO noted that customer numbers have increased 14%, to 36.2 million from 31.7 million – a number set to rise further.
As such, while customer service costs increased by 5% in that period, the average cost to manage VAT and CT payers increased on average, while the cost fell to serve each income tax self-assessment taxpayer. The NAO noted that calls and correspondence performance targets were not being met.
Overall, HMRC’s costs of administering the tax system are £4.3bn in 2023/24, to collect £829bn of tax. Its operational costs will increase circa £875m in the next few years due to tax policy changes announced between 2022 and 2024 – of which 57% is attributable to the introduction and running costs of MTD for income tax self-assessment (ITSA).
It cost HMRC £785m to run its digital tax systems in 2023/34, up 18% in real terms from 2019/20, with £482m spent on developing new systems and upgrading legacy systems.
“The cost to HMRC of running the tax system is increasing. In part this is due to rising complexity in the different tax regimes and taxpayer numbers, but it is also due to the additional cost of introducing and remediating digital systems, and moving to a more highly-skilled workforce,” stated the NAO.
MTD ITSA – the business cost
Of the 204 Tax Impact and Information Notes (TIINs) published between 2022 and 2024, which show the cost of policy changes upon businesses and individuals, HMRC identified 16 as having a significant impact upon businesses – 13 have an estimated implementation and ongoing cost of £917m, of which 83% is attributable to the costs of MTD ITSA.
“There is evidence that the tax system is imposing increased administrative burdens on taxpayers and their intermediaries, despite the availability of digital channels,” the NAO stated.
Tax agents and individuals – losing trust
The report noted that the joint HMRC/HM Treasury publication Tax Administration Strategy set out for the tax authority to build a modern and trusted system by 2030. However, progress has been mixed.
Its efforts to improve trust with taxpayers has seen it fall for large businesses to 70% for 2023 from 86% in 2020.
The proportion of agents with trust in HMRC has fallen to 49% from 61% between 2021 and 2023; it has fallen to 47% from 52% for individuals in the same time period. Small businesses’ trust has fallen to 65% from 70%. Trust has been stable for medium-sized businesses.
“Agents and other advisers are a crucial part of the tax system but they are not well-served by HMRC’s digital services currently,” the report noted. “[Some] agents and other advisers are not regulated and a risky subset are creating additional costs for HMRC. HMRC is developing a strategic approach to improve its relationship with intermediaries, including improving their access to digital services.”
Improve systems, reduce customer interactions
The report also flagged that the NAO has pushed HMRC to reduce customer interactions that are caused by HMRC’s process failures and delays, which accounted for 72% of customer calls to HMRC in 2023/24.
In the FT’s report, HMRC stated: “It costs us just half a penny to collect every pound of tax revenue, with the NAO recognising our compliance work provides good value for money.
“We’re already improving and modernising the tax system to deliver the services our customers expect and slash red tape for business, and ongoing investment in our digital services will be vital to closing the tax gap yet further.”
More information on the IFA tax series from 20 March onwards here.
