Government bodies entitled to directly charge the public for the services they provide are losing out on hundreds of millions of pounds a year because of a failure to match costs with fees, the National Audit Office has found.
The spending watchdog said it had identified £340m in under-recovered costs in 2023-24 alone in an examination of seven service areas. It said those service areas accounted for about one-third of the total for central government’s charged-for services when measured by revenue.
According to the NAO, HM Passport Office was responsible for £223m of the shortfall in 2023-24. The watchdog said that despite having a “full-cost recovery target” for providing passports, the Home Office body had racked up a total deficit of £916m over five years.
The NAO was generally positive about progress at HMPO, saying it had made “significant operational improvements” in recent years. However the watchdog said passport-related costs had increased because of the addition of expenses related to Border Force and because HMPO had found it hard to predict service demand during the pandemic.
HMPO’s shortfall came despite a 25% increase in fees in recent years.
At HM Courts and Tribunals Service there was a shortfall of £105m between family-court fees and the costs those fees were supposed to cover.
The NAO report noted that the Driver and Vehicle Licensing Agency had managed to balance the costs-and-fees revenue for its core activities.
Assessing the exercise as a whole, the NAO said one issue it identified was the slow pace at which fee changes are enacted. In the services it examined, it said fee changes took an average of 63 weeks to implement, “delaying cost recovery and creating financial uncertainty”.
A further stumbling block was said to be the frequent use of estimated data – which may not reflect the true cost of providing services – to set fees.
The NAO said none of the services examined recovered costs consistently, and HM Treasury did not provide enough oversight, challenge and guidance on how to manage charged services effectively. The watchdog said departmental accounting officers had “primary responsibility” for ensuring compliance with fee-setting rules.
“As a result, charging bodies are left to figure out separately how best to handle common operational challenges, financial risks from over- or under-recovery, and difficult trade-offs,” it said.
The NAO added that while HM Treasury’s principles for fees and charges encourage efficiencies, they do not incentivise them. “When costs arise, they can be passed on,” the report said. “This reduces the incentives for charging bodies to find efficiencies.”
NAO head Gareth Davies said HM Treasury should take a greater interest in departments’ cost-recovery capabilities and stop missing opportunities to deliver efficiencies and share good practice.
“Government bodies provide important services for the public and businesses, including issuing passports and driving licences, and filing company information,” he said.
“But many are not consistently recovering their costs – posing risks to the financial resilience of these services and fairness between users.
“HM Treasury should strengthen how it oversees cost recovery processes and provide more comprehensive guidance to charging bodies.”
Sir Geoffrey Clifton-Brown, chair of parliament’s Public Accounts Committee, said cost recovery was an “important mechanism to reduce the tax burden”. However, he said imbalances between fees and costs were creating risks for the resilience of public services and burdening taxpayers unfairly.
“Correct charging requires accurate data on costs and users, but the system is being hampered by a lack of monitoring and reporting from some departments, the time-consuming legislative process to change fees and limited checks from HM Treasury," he said.
“Better guidance and a more consistent approach on setting and amending fees and charges is also needed across government.
“We must learn from and share examples of good practice, creating opportunities to simplify fee-amending mechanisms and make efficiencies to ensure fairness for both feepayers and taxpayers.”
Civil Service World sought an HM Treasury response to the report. It had not provided one at the time of publication.