As tax collection costs rise, HMRC urged to put customer first – and be ready to adopt AI - new PAC report

HM Revenue & Customs (HMRC) must ensure its systems meet customers' needs while preparing to seize the opportunities of artificial intelligence (AI). In a report on the cost of the tax system, the Public Accounts Committee urges HMRC to lay out realistic plans to simplify the tax system and address taxpayers' concerns, as its costs rise and trust in it falls.

The costs of tax collection increased by £563 million (15%) in real terms over the period 2019-20 to 2023-24, with 240 tax policy changes announced in the years 2022-24. HMRC's compliance productivity has fallen, with returns declining from over £1.4m per compliance worker pre-pandemic, to £1.27m in 2023-24. This decline took place despite HMRC employing more senior staff, which added over £100m to HMRC's salary costs from 2019-20 to 2023-24. Trust in HMRC has also fallen among large businesses, small businesses, agents and individuals, and HMRC should work with taxpayers to quickly address the decline.

The report warns that some of HMRC's customer service processes are out of date. The authority still communicates too much with its customers by post. Representing c.70% of the 22m items of correspondence HMRC received in 2022-23, this is slow, costly and inconvenient. It has already agreed with the PAC that it is behind many other organisations in enabling customers to communicate securely through digital channels, and the report calls on HMRC to address the legacy IT systems that it has allowed to become out of date.

As part of PAC's ongoing scrutiny of the use of AI in government, the report calls on HMRC to make sure it is well-placed to capitalise on the opportunities presented by the technology. AI has the potential to improve HMRC's productivity and services – but the report finds that HMRC's out of date tech will constrain its use, while making it more vulnerable to the use of AI by bad actors. The report notes that HMRC recognised the state of its IT systems as a significant risk five years ago. Progress has been slow on fixing these due to the complexity of the issues, competing priorities and HMRC's underestimate of costs. HMRC was unable to say when it would complete the work because funding for the three years after 2025-26 will not be known until the Spending Review in June 2025.

The PAC urges HMRC to build taxpayers' needs into how it designs its systems, stressing the utmost importance of learning from the rollout of flagship transformation programme Making Tax Digital (MTD). MTD was imposed without much consultation on businesses, who did not know what the administrative costs would be. These came to an estimated net additional cost of £300m for businesses paying VAT over the period 2019-20 to 2023-24. The PAC warned in 2023 that HMRC had lost sight of needing to put taxpayers at the heart of changes to the system, and finds no strong evidence to suggest productivity improvements or other benefits for most VAT traders following MTD's introduction. The future extension of MTD to Income Tax self-assessment is set to impose further transitional costs for some taxpayers, with the ongoing costs of MTD to exceed ongoing savings by around £200 million each year.

Sir Geoffrey Clifton-Brown MP, Chair of the Committee, said: “HMRC needs to do much more to restore trust and confidence in its taxpaying consumers. The cost of its systems rising, trust from taxpayers declining, and a system of ever-growing complexity – the challenges on Day 1 for the new incoming chief executive of HMRC 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 21^st 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.

“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. HMRC's attempts to transform its services through Making Tax Digital, while generating extra revenue, have also imposed hundreds of millions in extra costs on the taxpayer, with more set to come. The report makes clear that it will cost self-assessment taxpayers £200m more than they save, and this is completely intolerable.

“Our inquiry has established multiple examples from other countries that HMRC could learn from in bringing its services up to date. We hope these are examples, as well as the recommendations in our report, help HMRC to deliver a service which puts the needs of its customers front and centre. We can see from the Committee's past scrutiny of the Passport Office that it is possible for public bodies to swiftly and radically transform their digital services while maintaining security. If it is possible for the Passport Office to achieve these outcomes, which handles just as much confidential information, then it will be possible for HMRC to learn the lessons and do the same.”

PAC report conclusions and recommendations 

The cost of administering taxes is increasing for HMRC and taxpayers. Since 2020, HMRC and HM Treasury have shared a joint aim to reduce the cost of running the tax system, but costs are rising. HMRC's costs of tax collection increased by £563 million (15%) in real terms over the period 2019-20 to 2023-24. HMRC's costs per taxpayer have been rising for Corporation Tax, VAT and Income Tax Self Assessment. Tax revenue increased at a similar rate (16%) to HMRC's costs over the period 2019-20 to 2023-24, due mainly to economic factors and tax policy decisions. The tax system is getting more complex. There have been 240 tax policy changes announced in the years 2022 to 2024 at an estimated net cost of £875 million to HMRC and £913 million to businesses over the next few years. As HMRC acknowledges, complexity drives opportunities for evasion and avoidance and increases the risk of error.  Complexity can also increase cost as some taxpayers may seek more reassurance from HMRC, adding to its workload. HMRC considers addressing complexity is the main way to help reduce the burdens of the tax system on business. The government made some announcements on simplification in the Autumn Budget 2024. HMRC hopes that further announcements will be made in due course.

Recommendation 1. HMRC should publish realistic plans to simplify the tax system and establish robust metrics for reporting the impact on its costs, and on taxpayers' costs, in its annual reports. The plans should explain how HMRC has identified areas of most concern to taxpayers and how it will address these.

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. 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 2.

1. 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. 
2. 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.

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 3. 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.

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 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 4.

1. 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.
2. b) HMRC should write to the Committee alongside its Treasury Minute response setting out how and when it will reduce unnecessary communication with customers by post and telephone and its estimates of the scale and timing of cost savings.

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 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 5. 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.

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 6. 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.