HM Revenue and Customs must modernise its systems and get ready to embrace new technologies such as artificial intelligence to “restore trust and confidence in its taxpaying consumers”, a committee of MPs has said.
HMRC should set out “realistic plans to simplify the tax system and address taxpayers’ concerns, as its costs rise and trust in it falls”, the Public Accounts Committee said in its latest report today, which compares the tax authority to a “lumbering dinosaur”.
The report found the costs of tax collection increased by £563m – 15% – in real terms between 2019-20 and 2023-24. It now costs over £20bn a year to administer tax – with the cost to HMRC standing at £4.3bn and most of the rest of the cost falling on businesses.
The MPs said the fall in productivity has happened despite HMRC employing more senior staff, adding £100m to the department’s wage bill in that time.
And HMRC estimates that the 240 changes to the tax system that have been announced between 2022-23 and 2023-24 will cost it a further £875m and businesses a further £913m over the next few years.
But at the same time, “navigating the tax system appears to be becoming more difficult rather than simpler for many taxpayers”, PAC said.
“Complexity is increasing, which adds cost, can lead to taxpayers making more mistakes and creates opportunities for avoidance and evasion,” it added.
And HMRC’s compliance productivity has fallen, with returns declining from over £1.4m per compliance worker pre-pandemic, to £1.27m in 2023-24.
The combination of all these factors means taxpayers’ trust in HMRC is falling, which the MPs said “could affect their willingness to meet their obligations to pay the right amount of tax on time”.
The report, which is published as part of PAC’s inquiry into the cost of the tax system, calls on HMRC to make sure it is “well-placed to capitalise” on the opportunities presented by AI.
It says AI has the potential to improve HMRC’s productivity and services, but that its out-of-date technology will make it harder to adopt, as well as making the department more vulnerable to the use of AI by bad actors.
Progress has been slow on fixing the problems presented by the state of HMRC’s IT systems, which the department accepted was a “significant risk” five years ago, because of competing priorities and an underestimate of costs, the report says.
One such problem is that some of HMRC’s customer service processes are outdated, according to the report, which says the tax authority “still communicates too much with its customers by post”.
Around 70% of the 22 million items of correspondence HMRC received in 2022-23 were via post, which is “slow, costly and inconvenient”.
PAC chair Sir Geoffrey Clifton-Brown said it is “truly frustrating to see how much of its business the tax authority still does by post”.
“Customers at the moment are forced to engage with an authority that is frankly a lumbering dinosaur,” he added.
HMRC was unable to tell the committee when it will complete the work on updating its legacy IT because funding for the three years after 2025-26 will not be known until the Spending Review in June.
The report calls on the department to write to PAC within three months of SR25 setting out its timetable for remediating its legacy IT systems, the forecast cost of investments and expected savings – and then report its progress and spending on remediation in its annual reports.
Clifton-Brown said the challenges HMRC's incoming chief executive – who will succeed Sir Jim Harra when he departs this spring – will face on day one of the job are "clear".
“It is time for HMRC to prioritise modernising its own systems so that it is fit to enter the second quarter of the 21st century. The potential for new technologies such as AI to augment HMRC’s efforts to tackle these issues is clear, and HMRC must move at pace to seize the opportunities it presents," he said.
An HMRC spokesperson said: "It costs HMRC just half a penny to collect every pound of tax revenue and the National Audit Office has said our compliance work provides good value for money." The NAO's February report nevertheless urged the department to ensure its planned boost in compliance staff over the coming years is accompanied by a return to pre-pandemic productivity levels and warned of "a risk that the expectation of lower compliance yield performance becomes the norm".
The spokesperson added: "As part of the government's Plan for Change, we're investing to modernise and reform the tax system, determined to reduce costs and the tax gap as we improve our compliance and customer services further."