Tax administration costs rising for government and taxpayers, says new report

The National Audit Office (NAO), the UK government’s spending watchdog, has published a report on ‘The administrative cost of the tax system’. 

The NAO says that an increasingly complex tax system is burdening government and business with billions in admin costs. It particularly highlights the cost to HMRC of dealing with ‘failure demand’ – work created by HMRC’s process failures and delays, customers chasing progress, and customers’ errors).

The report also notes that some taxpayers and their representatives are finding it more difficult to deal with their tax matters, leading to some loss of trust in HMRC.

Some key points from the report follow.

CIOT’s response to the report can be read here.

Rising cost to HMRC of administering the tax system

HMRC’s costs of administering the tax system increased by 15% (£563 million) in real terms between 2019-20 and 2023-24, with tax revenue rising at a similar rate.

The increase in administrative costs is attributed to several factors – 

(1) Increasing complexity (HMRC has estimated that the combined effect of changes announced between 2022 and 2024 will increase its costs cumulatively by around £875 million over the next few years)

(2) More people liable to pay Income Tax due to fiscal drag and population/employment growth (up from 31.7 million in 2020-21 to 36.2 million in 2023-24 with a further 1.6 million expected to be added between 2024-25 and 2027-28)

(3) Cost of compliance work (digital tools and higher-skilled staff)

The impact of Making Tax Digital (MTD) is significant: Of that £875 million figure more than half (£500 million) of the increase is attributable to the introduction and running costs of MTD for ITSA (a mix of one-off costs and those which will be incurred over multiple years).

Backs up CIOT/ICAEW research findings on calls chasing progress

Almost three quarters of customer calls to HMRC are resulting from what the NAO calls ‘failure demand’.

The report states (paragraph 3.19) that:

“Two areas where HMRC could greatly reduce costs for itself and taxpayers is by reducing interactions resulting from: ‘failure demand’ (that is, calls caused by HMRC’s process failures and delays, customers chasing progress, including when HMRC has not yet breached target timescales for responding, and customers’ errors), which accounted for 72% of customer calls to HMRC in 2023-24; and costly person-to-person interactions which could have been carried out online, which accounted for an estimated 66% of calls in 2023-24 (there is overlap between the two populations). Our May 2024 report Customer service: HM Revenue & Customs recommended that HMRC improve its understanding of failure demand and set a target to reduce failure demand affecting telephone and correspondence and thereby reduce cost. HMRC is considering its response to this recommendation.”

CIOT technical officer Lindsay Scott commented: “This report highlights the vicious cycle that ‘failure demand’ is inflicting on HMRC customer services – repeated unnecessary contact incurring costs for all parties.  The introduction of an automated progress tracking facility could play a key part in breaking this cycle.”

In a survey of tax agent interactions with HMRC last year, conducted jointly with ICAEW, CIOT suggested HMRC could save an estimated 1.7 million hours of call handlers’ time every year, or £36 million, if it put a tracking system in place. The survey also estimated that one in three calls to a HMRC helpline is progress chasing.

Increasing cost to taxpayers and intermediaries of tax administration 

The report says that the estimated annual cost on businesses to comply with the tax system is £15.4 billion and growing – but that this is likely to be an understatement, and notes disapprovingly that there is no equivalent estimate for individuals:

“There is evidence that the tax system is imposing increased administrative burdens on taxpayers and their intermediaries, despite the availability of digital channels. The system has become more complex over time, rather than more straightforward and easier to deal with. There are too few examples where system changes have considered the cost to taxpayers, or prioritised sufficiently those that will reduce cost.” (Report summary, paragraph 22)

The NAO notes that published assessments of the impact of tax policy changes rarely estimate the costs for businesses and individuals: 

“Of 240 TIINs published between 2022 and 2024, HMRC identified 16 changes as having a significant financial impact on businesses, of which 13 have estimated implementation and ongoing costs totalling £917 million (83% of which is attributable to the costs of Making Tax Digital for Income Tax Self Assessment). The remaining ones would incur ‘negligible’ additional costs (although these could have a significant cumulative impact)… Estimates of costs to business from changes to other government regulations are subject to external oversight, but this is not required for tax.” (Report summary, paragraph 8)

The NAO makes the following recommendations in this area:

• As part of its simplification strategy, HMRC should make a measurable commitment to reduce administrative cost burdens on customers, and published proposals should include an estimate of the costs being taken out of the system

• HMRC should analyse whether cost and benefit estimates published in TIINs with significant expected impacts were accurate, to help refine future estimates

• HMRC should consider the feasibility of introducing more external scrutiny and independent challenge of the estimates of business impacts included in TIINs 

• HMRC should publish its estimates of the costs of the tax system to businesses and individuals, and explore how it could identify the burdens on compliant individual taxpayers

Loss of trust and need for better working with intermediaries

The report notes that some taxpayers and their representatives are finding it more difficult to deal with their tax matters, leading to some loss of trust in HMRC:

“The HMRC Charter promises to provide services that minimise taxpayer costs. However, the most recent HMRC surveys of customers indicate that they are finding it harder to deal with their tax matters, particularly agents. Agents and other advisers are a crucial part of the tax system but they are not well-served by HMRC’s digital services currently. 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.” (Report summary, paragraph 19)

The NAO pays particular attention in the report to the role of intermediaries:

“Agents are vital in helping taxpayers whose affairs are complex or who lack the confidence to manage their own tax affairs. The Strategy advocated improving services for agents. HMRC acknowledges that agents and other intermediaries (such as software developers) are an important part of a healthy tax system, but that the current tax system creates ‘pain points’ for them, driving demand on customer services. In addition, digital service developments have not treated them on the same basis as taxpayers, and their access to client data is limited. HMRC has created an intermediaries directorate and has plans to provide intermediaries with more tailored digital services and improved guidance.

“Results from the HMRC 2023 agents’ survey found that those who were more negative about HMRC across a range of measures were more likely to have contacted HMRC by telephone because they could not resolve their issue online. There is a dedicated helpline for agents but less than 30% of them rated this positively. HMRC told us that the line has been monopolised by high volume agents (who deal with large numbers of clients, often for a short time only, and make requests or submit returns that generate repayments).

“The use of intermediaries can improve compliance. For example, the government’s legislative change in January 2021 to tackle tax non-compliance through online marketplaces, made the online marketplaces liable for the VAT due from overseas retailers using their sites.” (paragraphs 3.21-3.23)

The NAO recommends that HMRC should “be more ambitious in how it can better work with intermediaries to reduce system costs. 2025 is the midpoint of the Tax Administration Strategy and this is an appropriate moment to include more on the role of intermediaries in terms of commitments to provide access to digital services on an equal footing with taxpayers, and set out how unregulated agents will be managed. This might involve both responding to agents’ feedback, but also considering the level of compliance risk associated with different taxpayer representatives and the appropriate amount of compliance and quality assurance work.”

CIOT technical officer Lindsay Scott commented: “We welcome the NAO’s call for HMRC to be more ambitious in how it works with tax advisers and other intermediaries to reduce system costs and, in particular, their call for the government to commit to provide access to digital services to tax advisers on an equal footing with taxpayers.”