23rd Report - The cost of the tax system

Taxpayers’ trust in HMRC is falling. Trust in a tax authority is vital for the authority to effectively discharge its role as it affects the willingness of taxpayers to engage and pay the correct amount of tax on time. HMRC … Read more Taxpayers’ trust in HMRC is falling. Trust in a tax authority is vital for the authority to effectively discharge its role as it affects the willingness of taxpayers to engage and pay the correct amount of tax on time. HMRC says that trust has to be at the centre of everything that it does. In July 2020 HMRC and HM Treasury said they wanted to gradually increase the trust of taxpayers in HMRC. But since then, trust in HMRC has fallen among large businesses, small businesses, agents and individuals. HMRC’s customer charter promises to provide services that are designed around what the customer needs to do, and are accessible, easy and quick to use. 4 HMRC recognises that the lower service levels it has provided in recent years have affected levels of trust. The proportion of agents who reported finding it easy to deal with tax issues reduced from 50% in 2019 to 38% in 2023. recommendation a. HMRC should work with taxpayers and their representatives to understand why trust in HMRC is falling and what it can do to quickly address the decline. b. HMRC should publish the concerns it has heard and the actions it is taking to address these, as a first step to improving trust. Show less

HMRC’s compliance productivity has declined, despite its increased focus on prevention and investment in digital systems and higher–skilled staff. HMRC’s compliance work offers high returns and good value for money but its compliance returns have declined from over £1.4 million … Read more HMRC’s compliance productivity has declined, despite its increased focus on prevention and investment in digital systems and higher–skilled staff. HMRC’s compliance work offers high returns and good value for money but its compliance returns have declined from over £1.4 million per compliance worker prior to the COVID–19 pandemic, to £1.27 million per worker in 2023–24 (both values expressed in 2023–24 prices). The decline has taken place despite: HMRC investing in digital systems; focusing more on upstream compliance to prevent problems before they happen; and employing more higher–grade compliance staff. The latter, contributed to an increase in the overall seniority of HMRC’s workforce, which added over £100 million to HMRC’s salary costs over the period 2019–20 to 2023–24. The government is providing HMRC with resources to recruit 5,000 additional staff to achieve £2.7 billion of additional tax revenue a year by 2029–30 (a productivity level of £0.55 million per additional compliance worker). HMRC considers that raising the average return across all its compliance staff is difficult, but it acknowledges that it needs to return productivity to the levels its experienced staff previously achieved. recommendation HMRC should write to the Committee alongside its Treasury Minute response, explaining the steps it will take to return compliance productivity to pre–pandemic levels as soon as possible and seek year– on–year improvements thereafter. Show less

HMRC allowed many of its IT systems for administering tax and interacting with customers to become out of date, increasing both its costs and the burdens on taxpayers. In 2020, HMRC recognised its IT systems for administering tax were a … Read more HMRC allowed many of its IT systems for administering tax and interacting with customers to become out of date, increasing both its costs and the burdens on taxpayers. In 2020, HMRC recognised its IT systems for administering tax were a significant risk to operations, due to the postponement of maintenance and systems upgrades to secure cost savings. Spending Review 2020 enabled HMRC to spend more on its IT estate but progress in remediation is costing more and taking HMRC longer than expected, with some funding being reallocated to other 5 priorities in 2023–24. HMRC considers that the three key risks that arise from operating legacy systems to be lower levels of security, lower reliability and resilience, and higher costs of system changes. HMRC is now tracking progress on remediation and says it has a plan to remediate remaining legacy systems, but the speed of execution depends on HMRC’s spending review settlement for 2026–27 to 2028–29, which is due to be finalised by June 2025. Last year HMRC acknowledged that it is behind many other organisations in enabling customers to communicate securely through digital channels. It told us that in 2023–24 about 69% of all its interactions with customers were digital. Too much of its communication with customers continues to be by post which can be inconvenient and costly and can discourage customers from using its digital services. Improving its digital systems, and supporting more customers to use them, would help HMRC reduce calls to its helplines, two–thirds of which it estimates are avoidable, as the customer could have carried out the transaction, or found out the information, by using digital services. recommendation a. Within three months of the spending review being published, HMRC should write to the Committee setting out its timetable for remediating its legacy IT systems, the forecast cost of investments and expected savings. It should then report its progress and spending on remediation in its annual reports. Show less

It is of the utmost importance that HMRC learns lessons from its experience of implementing Making Tax Digital (MTD) and puts customer needs at the heart of plans to improve digital services. The previous Public Accounts Committee reported in 2023 … Read more It is of the utmost importance that HMRC learns lessons from its experience of implementing Making Tax Digital (MTD) and puts customer needs at the heart of plans to improve digital services. The previous Public Accounts Committee reported in 2023 that HMRC had lost sight of the need to put taxpayers at the heart of changes to the tax system. MTD was imposed on businesses without much consultation, and without businesses knowing what the administrative costs were going to be. HMRC completed the rollout of MTD for VAT in 2022, and plans to extend it from 2026–27 to many Income Tax Self Assessment taxpayers. HMRC estimates that MTD imposed net costs on VAT traders of around £300 million over the period 2019–20 to 2023–24. In February 2024, HMRC estimated that extending MTD to Income Tax Self Assessment will impose transitional costs of over £500 million on taxpayers, and will impose ongoing costs on taxpayers which will exceed their ongoing savings by 6 around £200 million each year. There is no strong evidence to date to suggest productivity improvements or other benefits for most VAT traders following the introduction of MTD. recommendation HMRC should ensure it conducts sufficient research into customer needs and design digital programmes and systems which meet those needs. HMRC should evidence its assessment of customer needs in its business cases and in public documents, including Tax Information and Impact Notes. Show less

We are concerned that HMRC is not well–placed to take advantage of the opportunities offered by technology, for example the development of artificial intelligence (AI) and e–invoicing. AI has the potential to improve the productivity and speed of HMRC services. … Read more We are concerned that HMRC is not well–placed to take advantage of the opportunities offered by technology, for example the development of artificial intelligence (AI) and e–invoicing. AI has the potential to improve the productivity and speed of HMRC services. But, as we have reported recently, achieving large–scale benefits from AI will require government departments to not only adopt new technology but also put in place the right foundations, including skills, infrastructure and the high–quality data on which AI depends. HMRC recognises that its ongoing use of legacy systems will constrain its exploitation of AI as they limit the accessibility and quality of data. Legacy systems also make HMRC more vulnerable to the use of AI by bad actors. HMRC has not provided some digital services that have been available to taxpayers in many of the world’s larger economies. HMRC has been slower than some tax authorities in adopting pre–population of tax returns and, along with others in government, has been slower at driving the adoption of e–invoicing, although the government began a consultation on e–invoicing in February 2025. recommendation HMRC should write to the Committee alongside its Treasury Minute response, with an assessment of how well–placed it is to take advantage of new technology including AI, and its plans and timetable for addressing the factors that constrain its capability and capacity to do so. 7 1 The cost of administering the tax system and trust in HMRC Introduction Show less

On the basis of a report by the Comptroller and Auditor General, we took evidence from His Majesty’s Revenue and Customs (HMRC) on the cost of administering the tax system.1

Tax policy changes are also increasing the cost of the tax system. Of the 240 changes announced over the period from 2022 to 2024, HMRC identified 16 changes as having a significant financial impact on businesses, of which 13 had … Read more Tax policy changes are also increasing the cost of the tax system. Of the 240 changes announced over the period from 2022 to 2024, HMRC identified 16 changes as having a significant financial impact on businesses, of which 13 had estimated implementation and ongoing costs totalling £913 million. HMRC also estimated that changes would further increase its costs over the next few years by around £875 million through a mix of one–off and ongoing costs.10 Show less

Given the increase in costs reported by the NAO, we asked HMRC what progress it had made on its key strategic measure to reduce the cost of running the tax system. HMRC said the increase in its costs since 2019–20 … Read more Given the increase in costs reported by the NAO, we asked HMRC what progress it had made on its key strategic measure to reduce the cost of running the tax system. HMRC said the increase in its costs since 2019–20 had been broadly the same as the increase in tax revenue. It said that in 2019–20, it faced two unsustainable structural funding gaps: a reduction in its compliance staffing; and under–investment in its IT function. The 2020 and 2021 Spending Reviews provided HMRC with funding to address both issues. HMRC also told us that it faces an underlying upward pressure as 5 Costs reallocated to HMRC’s operational and policy business groups. 6 C&AG’s Report, paras 2.12–2.13 7 C&AG’s Report, para 1.9 and Figure 5 8 C&AG’s Report, paras 6, 2.5, 3.3 9 For most taxes, the number of taxpayers for 2023–24 is not yet known. C&AG’s Report, para 1.12 and Figure 1. 10 C&AG’s Report, paras 1.18, 2.3 9 the number of taxpayers in the system is increasing.11 The number of Income Tax payers had increased by 14% from 31.7 million in 2020–21 to 36.2 million in 2023–24. The increase was due to the freezing of Income Tax thresholds since April 2022 and population and employment growth.12 The Office for Budget and Responsibility estimates that threshold freezes could take the number of taxpayers above 40 million by 2027–28.13 Show less

We asked HMRC about the cost implications of running the Scottish Income Tax system. HMRC said the way it administers Scottish Income Tax is same as for UK Income Tax. The Scottish Government pays for the “bit more money” HMRC … Read more We asked HMRC about the cost implications of running the Scottish Income Tax system. HMRC said the way it administers Scottish Income Tax is same as for UK Income Tax. The Scottish Government pays for the “bit more money” HMRC spends on IT and accounting needed, for example, to make sure that it accounts for Scottish Income Tax separately. It said that the additional rate band in Scotland makes its Income Tax system slightly more complex which might generate more customer contact, but this was at the margins.14 Show less

We asked HMRC why the cost to business of administering the tax system was so high. HMRC said that complying with tax obligations is an inevitable feature of doing business, and its aim was to make that cost as low … Read more We asked HMRC why the cost to business of administering the tax system was so high. HMRC said that complying with tax obligations is an inevitable feature of doing business, and its aim was to make that cost as low as possible whilst making sure businesses comply. It told us accounting and business software offers real opportunities to reduce the cost to businesses of managing tax compliance by making it “part and parcel” of what they do every day to run their business. HMRC said it had largely done that for Pay As You Earn Income Tax and, more recently, for VAT through its Making Tax Digital programme.15 Show less

We received written evidence from VAT Solutions which specialises in providing VAT advice and regularly interacts with HMRC on behalf of its clients. VAT Solutions gave examples of how inefficiencies in the VAT system resulted in unnecessary delay and increased … Read more We received written evidence from VAT Solutions which specialises in providing VAT advice and regularly interacts with HMRC on behalf of its clients. VAT Solutions gave examples of how inefficiencies in the VAT system resulted in unnecessary delay and increased costs to taxpayers, including increasing the fees taxpayers pay agents. We asked HMRC to respond to the examples provided by VAT Solutions.16 In written evidence provided after our evidence session, HMRC expressed a willingness to engage with VAT Solutions on the specific cases to which it had referred. HMRC also acknowledged that a system issue had caused VAT returns and payments to become “stuck” in the system in December 2024, and told us it has now resolved the issue, including the removal of interest and penalty charges.17 11 Q 11; C&AG’s Report, paras 2.10, 2.12 12 C&AG’s Report, para 2.5 13 Office for Budget Responsibility, Economic and fiscal outlook, CP 1169, October 2024, para 3.58 14 Qq 16, 17 15 Q 26 16 CTS0003 17 Correspondence from HMRC, 19 March 2025 10 Show less

HMRC does not estimate the total costs incurred by individuals in administering tax.18 We therefore asked HMRC why it gave less attention to individuals’ costs than businesses. It said it focused on individuals’ wider customer experience, including the time they … Read more HMRC does not estimate the total costs incurred by individuals in administering tax.18 We therefore asked HMRC why it gave less attention to individuals’ costs than businesses. It said it focused on individuals’ wider customer experience, including the time they take to administer tax and the ease of dealing with tax issues, using metrics such as customer satisfaction.19 We also asked HMRC why the rate it uses to estimate the cost of customer time is three years out of date. HMRC said that following a recommendation in the C&AG’s report, it is “committed to looking at the feasibility of coming up with a measure” for the costs incurred by individuals in administering their tax.20 Show less

We asked HMRC what areas of the tax system need to be addressed to achieve efficiencies. HMRC said the tax system is very complex, which generates opportunities for evasion and avoidance, can cause errors and increase costs through greater customer … Read more We asked HMRC what areas of the tax system need to be addressed to achieve efficiencies. HMRC said the tax system is very complex, which generates opportunities for evasion and avoidance, can cause errors and increase costs through greater customer contact, as taxpayers seek reassurance from HMRC on what they need to do.21 It explained that it can often be very difficult to simplify tax policy because complexity can be there for good reasons, such as to achieve policy objectives and maintain fairness. However, HMRC said that simplification is the main way to help reduce burdens on business. It explained that, since the abolition of the Office of Tax Simplification in 2022, HMRC and Treasury policy advisers are responsible for covering simplification in their advice to Ministers. It told us that some announcements on simplification had been made at the 2024 Autumn Budget, and it hoped that further announcements could be made in spring 2025.22 Trust in HMRC Show less

In July 2020 HMRC and HM Treasury published the Tax Administration Strategy (the Strategy) which set out how they would build a modern, trusted tax administration system by 2030.23 As part of the Strategy they wanted to gradually increase the … Read more In July 2020 HMRC and HM Treasury published the Tax Administration Strategy (the Strategy) which set out how they would build a modern, trusted tax administration system by 2030.23 As part of the Strategy they wanted to gradually increase the trust of taxpayers in HMRC. Trust is seen as vital for a tax authority to effectively discharge its role, including the willingness of taxpayers to pay the correct amount of tax on time.24 But since the Strategy was launched, trust in HMRC has declined for all taxpayer groups other than medium–sized business. 18 C&AG’s Report, para 7 19 Qq 27, 30 20 Qq 28–29 21 Q 15 22 Qq 25, 33 23 HMRC and HM Treasury, Tax administration strategy, 21 July 2020 24 C&AG’s Report, para 3.3 11 • For large businesses, trust in HMRC fell from 86% in 2020 to 70% in Show less

We asked about taxpayers’ declining trust in HMRC. HMRC said there had been a decline in trust globally with governments and with public bodies, and it was also subject to that decline. It told us that it had not been … Read more We asked about taxpayers’ declining trust in HMRC. HMRC said there had been a decline in trust globally with governments and with public bodies, and it was also subject to that decline. It told us that it had not been providing services up to the standards it wanted to, and this had affected taxpayers’ trust. HMRC reinforced the importance of trust saying that “it has to be at the centre of everything that we do, because the UK’s tax system depends on people voluntarily complying and having confidence in HMRC.” It said trust depends on “both the quality of the processes and communications that we give people, as well as the quality of the service when they have to deal with us.” 26 Show less

The HMRC Charter promises to “provide services that are designed around what [the customer] need[s] to do, and are accessible, easy and quick to use, minimising the cost to [them]”.27 HMRC’s surveys have found a significant proportion of taxpayers do … Read more The HMRC Charter promises to “provide services that are designed around what [the customer] need[s] to do, and are accessible, easy and quick to use, minimising the cost to [them]”.27 HMRC’s surveys have found a significant proportion of taxpayers do not find it easy to deal with HMRC. In 2023, 71% of large businesses said they found it easy to deal with HMRC, but only 38% of agents found it easy. The proportion of agents saying they found it easy had fallen from 50% in 2019.28 HMRC appoints a customer compliance manager for each large business.29 The manager is expected to build an in–depth knowledge of the business. HMRC says their primary role is to make sure businesses pay the correct amount of tax, at the right time.30 Show less

We asked HMRC why it provided additional support to large business. HMRC told us customer compliance managers were there to manage the risks large business pose to tax revenue and not to give them a better 25 HMRC has reported … Read more We asked HMRC why it provided additional support to large business. HMRC told us customer compliance managers were there to manage the risks large business pose to tax revenue and not to give them a better 25 HMRC has reported the change for small businesses was not statistically significant, year on year. C&AG’s Report, para 3.3 26 Qq 33, 35 27 HMRC, The HMRC Charter, updated 30 July 2024 28 C&AG’s Report, para 3.18 29 HMRC, HMRC internal manual: Customs Civil Penalties Guidance, updated 28 October 2024, section CCPG21500–HMRC roles: role of Customer Compliance Manager 30 HMRC, HMRC’s compliance approach for large businesses, updated 10 April 2024, section Customer Compliance Managers 12 service. It said its approach was to “man–mark” each large business to understand the risks they pose and their attitude to tax compliance, and then decide the resources HMRC need to deploy to tackle the risks.31 31 Q 25 13 2 HMRC’s compliance performance and use of technology HMRC’s compliance performance Show less

HMRC’s compliance work helps to reduce the difference between taxes theoretically owed and those actually paid (known as the ‘tax gap’), resulting from accidental or deliberate failure of taxpayers and their representatives to pay the right amount of tax. HMRC’s … Read more HMRC’s compliance work helps to reduce the difference between taxes theoretically owed and those actually paid (known as the ‘tax gap’), resulting from accidental or deliberate failure of taxpayers and their representatives to pay the right amount of tax. HMRC’s Customer Compliance Group (CCG) contains the operational directorates that deal directly with non–compliance.32 Show less

HMRC explained that its strategy is to promote good compliance and prevent non–compliance (collectively known as ‘upstream’ compliance), and this is “bearing fruit,” with upstream yield increasing to about a third of all yield in 2023–24. HMRC considers that upstream … Read more HMRC explained that its strategy is to promote good compliance and prevent non–compliance (collectively known as ‘upstream’ compliance), and this is “bearing fruit,” with upstream yield increasing to about a third of all yield in 2023–24. HMRC considers that upstream compliance is less costly than ‘downstream’ work (carried out in response to suspected non–compliance), although downstream work continues to be necessary.33 HMRC acknowledged that it does not currently have sufficient analysis of how its costs fall between upstream and downstream compliance or the marginal returns from adding compliance resource.34 HMRC also told us that it has been investing in digital support for its compliance work to help it better target cases, thereby improving compliance productivity and the experience of compliant customers by reducing checks on them.35 Show less

The Spending Reviews in 2020 and 2021 enabled HMRC to increase its compliance staffing. In 2021–22, CCG recruited mainly senior staff to undertake compliance work. Around the same time, HMRC was reducing its frontline customer service workforce, most of whom … Read more The Spending Reviews in 2020 and 2021 enabled HMRC to increase its compliance staffing. In 2021–22, CCG recruited mainly senior staff to undertake compliance work. Around the same time, HMRC was reducing its frontline customer service workforce, most of whom were in lower grades. These two changes were the main factors which led to the proportion 32 C&AG’s Report, para 2.22 33 Q 37: C&AG’s Report, para 2.26 34 Qq 12, 38 35 Q 56 14 of HMRC’s staff in more senior grades increasing from 41% to 53%.36 This change in grade mix increased HMRC’s salary costs by over £100 million over the period 2019–20 to 2023–24. We challenged HMRC about the increase in its staff costs. It said the grading of compliance staff “reflects the challenges we have in recruiting, training and retaining the staff that we need to do that work.” 37 Show less

HMRC’s main measure of the performance of its compliance work is through tracking compliance yield arising from its interventions.38 In December 2022, the NAO reported that HMRC’s compliance work offers good value for money.39 In the five years prior to … Read more HMRC’s main measure of the performance of its compliance work is through tracking compliance yield arising from its interventions.38 In December 2022, the NAO reported that HMRC’s compliance work offers good value for money.39 In the five years prior to the COVID–19 pandemic (2015–16 to 2019–20), CCG’s average yield per compliance worker was £1.48 million (in 2023–24 prices), or £1.41 million if two exceptionally large cases were excluded. Compliance productivity has fallen since, with average returns in 2023–24 of £1.27 million per compliance worker. In Autumn Budget 2024, the government gave HMRC funding to recruit 5,000 additional staff to generate £2.7 billion of additional tax revenue by 2029–30. This will require a productivity level of around £0.55 million per each new compliance worker.40 Show less

As its compliance productivity had fallen, we asked HMRC whether it could reassure us that it was delivering value for money. It said when it brings in new compliance resource it expects to see a dip in productivity before recovering. … Read more As its compliance productivity had fallen, we asked HMRC whether it could reassure us that it was delivering value for money. It said when it brings in new compliance resource it expects to see a dip in productivity before recovering. HMRC told us this was because new staff are not as productive as experienced staff; it has to move existing staff away from frontline work to mentor and support new staff; and every time it adds compliance resource, the marginal rate of return of the new resource will probably be lower as it is already working the cases that have the most potential to generate yield. HMRC acknowledged that it has to get productivity “back up to the levels that our experienced staff have had before”.41 HMRC’s legacy IT systems and systems for interacting with customers Show less

HMRC has one of the largest and most complex IT estates in the UK, and it faces a significant challenge to modernise its IT infrastructure to keep pace with changing technology. In 2020 the NAO reported that HMRC recognised 36 … Read more HMRC has one of the largest and most complex IT estates in the UK, and it faces a significant challenge to modernise its IT infrastructure to keep pace with changing technology. In 2020 the NAO reported that HMRC recognised 36 Senior grades include all grades from higher executive officers up to and including senior civil servants. Less than 1% of HM Revenue & Customs’ staff were senior civil servants in March 2024. C&AG’s Report, para 2.10 and Figure 7 37 Qq 38, 42 38 C&AG’s Report, para 2.24 39 Comptroller and Auditor General, Managing tax compliance following the pandemic, Session 2022–23, HC 957, National Audit Office, December 2022 40 C&AG’s Report, paras 2.24, 2.29 41 Qq 12, 42; C&AG’s Report, para 2.29 15 the state of its IT systems as a significant risk, due to the postponement of operational maintenance and systems upgrades to secure cost savings.42 The government provided additional funding in Spending Review 2020 to improve the agility, resilience and security of HMRC’s IT. Remediating legacy systems has taken HMRC longer than it had expected and is costing more.43 Show less

HMRC explained that there are three key risks that arise from operating legacy systems: lower levels of security; lower reliability and resilience; and higher costs of system changes. HMRC said that its executive team and its digital team track how … Read more HMRC explained that there are three key risks that arise from operating legacy systems: lower levels of security; lower reliability and resilience; and higher costs of system changes. HMRC said that its executive team and its digital team track how up to date its systems are and how that is changing over time. HMRC told us that it now has a tolerable level of risk in its IT estate, but progress on remediation was not as fast as it would like.44 Show less

We asked HMRC why it had taken longer and was costing more to remediate its legacy systems. HMRC said that some of the systems had proved more complex than expected and it had underestimated costs.45 Progress had also been slowed … Read more We asked HMRC why it had taken longer and was costing more to remediate its legacy systems. HMRC said that some of the systems had proved more complex than expected and it had underestimated costs.45 Progress had also been slowed by HMRC transferring some funding for one of its remediation programmes in 2023–24 to higher priorities.46 We asked HMRC whether it now understands what more it needs to do, what it will cost and when it expects remediation to be complete. HMRC said that it had a good understanding of what it needed to do and had a plan. But it was unable to say when it would complete remediation because funding for the three years after 2025–26 would not be known until it had its spending review settlement in June 2025.47 Show less

Last year HMRC acknowledged that is behind many other organisations in enabling customers to communicate securely through digital channels. In 2022–23, approximately 70% of the 22 million items of correspondence HMRC received came in through the post. In January 2025 … Read more Last year HMRC acknowledged that is behind many other organisations in enabling customers to communicate securely through digital channels. In 2022–23, approximately 70% of the 22 million items of correspondence HMRC received came in through the post. In January 2025 we therefore recommended that as part of its digital roadmap HMRC should prioritise introducing systems for customers to submit files and send secure messages electronically to HMRC.48 The roadmap was due to be published in Spring 2025.49 HMRC told us that it sends “out a lot of paper outputs” and customers receiving post were then inclined to ring or write rather than using HMRC’s digital channels.50 42 Comptroller and Auditor General, Report by the Comptroller and Auditor General, published alongside the 2019–20 Accounts, HC 891, November 2020, para 2.40 43 C&AG’s Report, paras 10, 2.12 44 Qq 44–45, 58 45 Q 44 46 C&AG’s Report, para 2.12 47 Qq 46, 50 48 Committee of Public Accounts, HMRC Customer Service and Accounts, Third Report of Session 2024–25, HC 347, 22 January 2025, para 4, p 5 49 Q 74, Committee of Public Accounts, Oral evidence: HMRC Customer Service and Accounts 2023–24, HC 347, November 2024 50 Q 76 16 Show less

We asked HMRC about the potential for digital systems to reduce costs. It told us that in 2023–24 about 69% of all its interactions with customers were digital and included taxpayers filing their Self Assessment returns online and using the … Read more We asked HMRC about the potential for digital systems to reduce costs. It told us that in 2023–24 about 69% of all its interactions with customers were digital and included taxpayers filing their Self Assessment returns online and using the HMRC app to check there Pay As You Earn code.51 HMRC also told us that about two thirds of the calls it receives are avoidable, as the customer could have carried out the transaction, or found out the information, by using digital services. HMRC said if it could divert or deflect that contact away to digital channels it could reduce its costs.52 Making Tax Digital Show less

HMRC launched its flagship transformation programme Making Tax Digital (MTD) in 2015–16. MTD requires business taxpayers to use third–party software to keep and submit quarterly digital tax records with the aim of: reducing the amount of tax lost from taxpayers … Read more HMRC launched its flagship transformation programme Making Tax Digital (MTD) in 2015–16. MTD requires business taxpayers to use third–party software to keep and submit quarterly digital tax records with the aim of: reducing the amount of tax lost from taxpayers making avoidable or careless errors; helping businesses better understand their tax position; and reducing the burden of submitting tax returns.53 HMRC completed the roll–out of MTD for VAT in 2022. HMRC estimated that MTD had increased net costs for VAT traders by around £300 million over the period 2019–20 to 2023–24.54 It also estimated that tax revenue from VAT traders increased by almost £200 million in 2019–20 (at that point not all VAT traders were using MTD).55 There is no strong evidence to date to suggest productivity improvements for most VAT traders following the introduction of MTD.56 HMRC consider that the productivity of small businesses will benefit more generally from the process of digitalisation.57 Show less

The previous Public Accounts Committee found in 2023 that rather than reducing the overall burden on customers as HMRC had initially expected, MTD was imposing significant additional burdens and costs at a time when many of its customers could least … Read more The previous Public Accounts Committee found in 2023 that rather than reducing the overall burden on customers as HMRC had initially expected, MTD was imposing significant additional burdens and costs at a time when many of its customers could least afford it. The Committee concluded that HMRC had lost sight of the need to put taxpayers at the heart of changes to the tax system and there was a risk that planned changes would add further 51 Q 54 52 Q 74 53 Committee of Public Accounts, Progress with Making Tax Digital, Eighteenth Report of Session 2022–23, HC 1333, 24 November 2023, p 3–4 54 C&AG’s Report, para 3.15 55 Comptroller and Auditor General, Progress with Making Tax Digital, Session 2022–23, HC 1319, National Audit Office, June 2023, para 2.14 56 C&AG’s Report, para 3.16 57 Q 64 17 complications rather than simplify the system.58 Since then the government has confirmed that MTD will be extended to Income Tax Self Assessment for many sole traders and landlords.59 Show less

In February 2024, HMRC estimated that extending MTD to Income Tax Self Assessment from 2026–27 would impose transitional costs of around £561 million on sole traders and landlords with incomes above £30,000, and the continuing annual costs of MTD to … Read more In February 2024, HMRC estimated that extending MTD to Income Tax Self Assessment from 2026–27 would impose transitional costs of around £561 million on sole traders and landlords with incomes above £30,000, and the continuing annual costs of MTD to these taxpayers would exceed the continuing annual benefits by around £196 million.60 In the Autumn Budget 2024 the government announced that MTD will be extended to sole traders and landlords with qualifying incomes over £20,000 “by the end of this Parliament”.61 In written evidence provided after our evidence session HMRC further explained that its current plans for MTD for Income Tax will require around 3 million business customers within Income Tax Self Assessment to operate MTD and use compatible software and that around 4 million with income below £20,000 will remain non–mandated.62 Show less

We asked HMRC whether there were potential security concerns that could be posed by the third–party MTD software taxpayers use to submit their tax returns, including whether there were risks to HMRC’s own systems.63 In written evidence provided after our … Read more We asked HMRC whether there were potential security concerns that could be posed by the third–party MTD software taxpayers use to submit their tax returns, including whether there were risks to HMRC’s own systems.63 In written evidence provided after our evidence session, HMRC told us it takes security very seriously. It said all data sent to HMRC systems is monitored for fraud prevention, and to ensure that customer data is safe. It also said that it sets out strict specifications for third–party MTD software products in terms of cyber–security and the security, storage, management and processing of customer data.64 Show less

We asked HMRC why MTD will increase the burdens on self assessment business taxpayers. It told us the costs MTD will impose on a business will vary depending on the degree to which they already used business accounting software. Those … Read more We asked HMRC why MTD will increase the burdens on self assessment business taxpayers. It told us the costs MTD will impose on a business will vary depending on the degree to which they already used business accounting software. Those that currently do not use business accounting software will face higher costs but their digitalisation through MTD should increase their productivity as well as their tax compliance. HMRC said MTD would generate £4 billion of additional tax revenue by 2029–30 as a significant number of taxpayers had not been complying. We asked why customers who were already compliant were facing an additional burden from MTD. HMRC explained that “the approach that we and successive 58 Committee of Public Accounts, Progress with Making Tax Digital, Eighteenth Report of Session 2022–23, HC 1333, 24 November 2023, p 3 59 C&AG’s Report, para 3.15 60 C&AG’s Report, para 3.15 61 HM Treasury, Autumn Budget 2024: Fixing the foundations to deliver change, HC 295, October 2024, para 5.21 62 Correspondence from HMRC, 19 March 2025 63 Qq 72–73 64 Correspondence from HMRC, 19 March 2025 18 Governments have adopted is one of a universal drive to encourage small businesses to improve their record–keeping and to improve their use of software.” 65 Show less

We asked HMRC what lessons it should learn from the last 10 years of MTD. HMRC explained that when it has completed MTD for Income Tax Self Assessment virtually every business in the UK will be using business accounting software … Read more We asked HMRC what lessons it should learn from the last 10 years of MTD. HMRC explained that when it has completed MTD for Income Tax Self Assessment virtually every business in the UK will be using business accounting software that speaks directly to HMRC’s systems. HMRC said it needed to look at how the software can be leveraged to help with tax compliance and business productivity, for example by guiding and supporting businesses.66 HMRC also referred to its joint consultation, with the Department for Business & Trade, on e–invoicing which began in February 2025. 67 HMRC thought e–invoicing might be relatively easy to add to business accounting software.68 Use of Artificial Intelligence and other emerging technologies Show less

In our recent report on the use of AI in government we said: Artificial intelligence has the potential to transform public services by automating routine tasks, making public services quicker and more efficient, and making better use of government data … Read more In our recent report on the use of AI in government we said: Artificial intelligence has the potential to transform public services by automating routine tasks, making public services quicker and more efficient, and making better use of government data to target support at those that need it. ….. Achieving large–scale benefits will require not only adoption of new technology but significant change in business practices, and will be dependent on government putting in place the right foundations, including access to skills, infrastructure and high–quality data.69 Show less

Written evidence, received from Southampton University academics and accountants, Dr Md Hosam Al Kaddour and Dr Nouha Saber, recommended that HMRC accelerates digital transformation, including investment in AI–driven customer support to handle routine inquiries and thus reduce call centre costs.70 … Read more Written evidence, received from Southampton University academics and accountants, Dr Md Hosam Al Kaddour and Dr Nouha Saber, recommended that HMRC accelerates digital transformation, including investment in AI–driven customer support to handle routine inquiries and thus reduce call centre costs.70 Written evidence, received from Dr Edidiong Offiong Bassey (a lecturer and researcher on taxation at Cardiff University), recommended that HMRC upskill its staff to navigate AI–driven compliance tools effectively. 65 Qq 64–66 66 Q 67 67 HM Revenue & Customs and Department for Business & Trade, Electronic invoicing: promoting e-invoicing across UK businesses and the public sector, February 2025 68 Q 67 69 Committee of Public Accounts, Use of AI in Government, Eighteenth Report of Session 2024–25, HC 356, 26 March 2025 70 CTS0005 19 Dr Bassey also recommended that HMRC should engage with the use of AI to prevent fraudulent tax technology providers from misleading taxpayers and act to prevent unregulated AI–based tax avoidance schemes.71 Show less

We asked HMRC whether the age of some of its IT systems were going to make it more difficult to adopt AI. HMRC agreed and considers the “critical thing with AI is making sure you really have a handle on … Read more We asked HMRC whether the age of some of its IT systems were going to make it more difficult to adopt AI. HMRC agreed and considers the “critical thing with AI is making sure you really have a handle on where your data is and that you are managing your data well.” 72 We also asked HMRC about the risk posed by AI to tax evasion and avoidance.73 HMRC told us that “it is a fact of life that bad actors tend to be a bit more agile and a bit more flexible than good actors. You see that right across big organisations, public sector and private sector.” HMRC also agreed that legacy systems are more likely to suffer cyber–attacks.74 Show less

We were also concerned that HMRC has not been making good use of other technologies. In particular, it appears that the UK’s tax system is not as efficient for customers as the systems in some other countries such as Estonia, … Read more We were also concerned that HMRC has not been making good use of other technologies. In particular, it appears that the UK’s tax system is not as efficient for customers as the systems in some other countries such as Estonia, Denmark, Finland, Canada and Australia.75 In 2023, the NAO reported that many tax authorities in other countries with large economies were providing digital services to VAT traders, personal taxpayers and corporate taxpayers that were not widely available in the UK, such as pre–population of tax returns with income and expenses, and enabling taxpayers to file objections to HMRC’s decisions digitally. The NAO also reported that 15 G20 countries had responded to a 2017 OECD survey, with nine reporting they provided a “whole of taxpayer” view across multiple taxes.76 HMRC is still working to provide UK taxpayers with this view through its single customer account programme.77 Show less

The written evidence received from Dr Edidiong Offiong Bassey also suggests that HMRC is not making the best use of technology. In particular, he indicated there has been limited promotion in the UK of electronic invoicing and electronic fiscal devices … Read more The written evidence received from Dr Edidiong Offiong Bassey also suggests that HMRC is not making the best use of technology. In particular, he indicated there has been limited promotion in the UK of electronic invoicing and electronic fiscal devices which have seen 71 CTS0001 72 Q 48 73 Q 49 74 Qq 45–46 75 Q 12 76 Comptroller and Auditor General, Progress with Making Tax Digital, Session 2022–23, HC 1319, National Audit Office, June 2023, Figure 11 & para 3.36 77 Infrastructure and Projects Authority, Annual Report 2023–24, January 2025, p 37 20 positive results elsewhere.78 Some countries require businesses to use e–invoices for at least some transactions.79 E–invoicing can have a big impact on simplifying communications and reducing non–compliance.80 Show less

We asked HMRC about its joint consultation with the Department for Business & Trade on e–invoicing which it launched in February 2025. HMRC said e–invoicing has the potential to help businesses and build tax compliance into the way they run … Read more We asked HMRC about its joint consultation with the Department for Business & Trade on e–invoicing which it launched in February 2025. HMRC said e–invoicing has the potential to help businesses and build tax compliance into the way they run their business. We asked what was being covered in the consultation. HMRC said the consultation included asking businesses and customers about what information should be reported to HMRC.81 78 CTS0001 79 HM Revenue & Customs and Department for Business & Trade, Electronic invoicing: promoting e–invoicing across UK businesses and the public sector, February 2025, Section What is e–invoicing. 80 C&AG’s Report, para 3.12 81 Qq 26, 70 21 Show less