Treasury’s approach to charging for public services has unfair impact on taxpayers, says PAC report

- Public services' financial resilience at risk amid significant imbalance between fees and costs 

HM Treasury's passive approach to how fees and charges are set for public services has resulted in large and unfair surpluses and deficits for the taxpayer. In a new report on how government generates income for itself, the Public Accounts Committee (PAC) finds that not enough is being done to support departments in how they charge for services, resulting in inconsistencies and poor practice across government.

The report finds that significant imbalances between fees and costs pose risks to the financial resilience of public services. For instance, passports and family court fees have repeatedly missed cost-recovery targets by more than 10% for five consecutive years. If departments don't recover costs through their fees, costs must then either be absorbed within existing budgets, or funded through general taxation. This is unfair to taxpayers when they subsidise services that should be funded by those who use them.

The Treasury accepted to the PAC's inquiry that its approach to overseeing cost recovery by departments has been too passive. To ensure sufficient scrutiny over charged services, the report recommends it introduce an annual review cycle for all charged services within a year.

The PAC further finds that public scrutiny is being held back by the failure to publish adequate or consistent information on fees and charges by public bodies. Users are not given sufficient information by departments to understand what they are being charged for, and the aims of charges are often unclear. The report identifies ambiguity in Treasury's directions on what bodies need to report and at what level of detail. Partly as a result, none of the bodies examined as part of the inquiry fully met Treasury's disclosure requirements in 2023-24. The PAC is calling for these reporting requirements to be standardised to facilitate effective public and Parliamentary scrutiny.

A positive case study in the Committee's report is found in the Driver and Vehicle Licensing Agency (DVLA), which has held fees at 2014 levels by absorbing inflation through digitisation of its services, while also improving service quality. The report urges Treasury to lay out explicit incentives to reward departments that improve productivity and modernise services for users. The report finds government's current approach to be largely reactive, relying on bodies meeting efficiency targets set during spending reviews.

Sir Geoffrey Clifton-Brown MP, Chair of the Public Accounts Committee said: “Recent weeks have rightly seen loud debate on decisions of great import made by government in how money will be raised to fund services. Our Committee of course looks at the other side of the coin, with our remit more focused on how well taxpayers' money is spent, rather than how it is raised. However, with this report we find that the Treasury could be doing far more to ensure that government services raise money for themselves effectively at the local level. At present, central government is too prone to sitting back and watching as departments take an inconsistent and too-opaque approach to setting fees and charges.

“When services fail to wash their own faces by under-recovering costs, this means that the money to provide them must come from somewhere – either from existing budgets, or from the pockets of taxpayers who will effectively end up paying twice. This is deeply unfair. The process for changing fees is also too slow. The parliamentary process could be simplified here, in order that secondary legislation would not be required for the vast majority of fee changes, as it is at present. Importantly, this report is not calling for any kind of crackdown from the Treasury. We make clear that central government taking a front-footed approach can mean just as much carrot as stick, in incentivising departments that get this right. We look forward to seeing the improved system government proposes as part of its response to this report, which we hope will lay the groundwork for a fees and charges landscape that delivers better value for money for the taxpayer.”

PAC report conclusions and recommendations 

The Treasury is not doing enough to actively support government bodies in managing their fees and charges effectively, resulting in inconsistent and poor practices across departments. Despite setting the guidance on managing fees and charges, the Treasury has relied primarily on individual accounting officers to oversee how their own departments charge for services resulting in a siloed rather than system-wide approach. The Treasury guidance lacks operational detail on common challenges that charging bodies face, such as understanding costs, forecasting accurately and managing inflationary pressures. This contributes to poor cost recovery; in 2023-24, against a 100% target across six of the seven case study services, the average cost recovery rate was only 88%. The Treasury agrees it can improve financial management of fees and charges by enhancing its guidance and facilitating the sharing of good practice. The Treasury also agrees its guidance can outline more clearly the hierarchy of trade-offs and risks faced by charging bodies and how best to manage them. Until the recent establishment of a working group in the Government Finance Function to facilitate the sharing of good practice, there had not been a cross-government forum for systemic learning on managing fees and charges.

Recommendation 1. Alongside its Treasury minute response to this report, the Treasury should write to the Committee setting out a comprehensive time-bound plan on how it will be more systematic in supporting fee-charging public bodies. This should include issuing operational guidance on areas such as setting fees and making trade-offs; and establishing a mechanism to share good practice to support the improved financial management of fees and charges across government.

The Treasury has been too passive in its oversight of fees and charges resulting in large surpluses and deficits which unfairly impacts taxpayers and potentially future service users.  The Treasury's current oversight of fees and charges is through its spending teams and during Spending Reviews. This arrangement is ineffective, as over the five-year period from 2019-20 to 2023-24, none of the seven services we looked at consistently charged the correct amount to reflect actual service costs. Notably, passports and family court fees have repeatedly missed cost-recovery targets by more than 10% for five consecutive years. Persistent imbalances between fees and costs creates risks for the resilience of public services and place a burden on taxpayers, who may need to subsidise under-recovering services. Those paying fees can be unfairly charged. For example, current users may be overcharged, or future users can face higher fees to cover accumulated deficits due to past undercharging. For instance, HM Passport Office had a significant shortfall of £223 million in 2023-24, contributing to a total deficit of £916 million over five years. The Treasury accepts that its approach has been too passive, and engagement with charging bodies is reactive rather than proactive in overseeing cost recovery.

Recommendation 2. To ensure sufficient scrutiny over charged services and to support bodies to achieve their cost-recovery targets, the Treasury should:

1. a) Introduce an annual review cycle within 12 months for all charged services covering service design, consent status and implications for fairness to taxpayers and current and future service users and fee payers.
2. b) Conduct targeted and proportionate deep-dives with bodies that have missed their cost recovery targets by more than 10% in two consecutive years and publish a time-bound recovery plan with clear milestones.

The Treasury and Department processes for changing fees are too slow and complex, which makes it harder for bodies to manage effectively their service costs and fee revenues. The case study services took an average of 63 weeks to change their fees.  This results in long periods where their fees do not align with current costs, making effective cost-recovery difficult. Parliamentary scrutiny is required for secondary legislation which, while vital for accountability, adds complexity and uncertainty to the timeline that is outside of departmental control. The decision-making process is cumbersome, with multiple layers of approvals from parent departments and the Treasury which are not always proportionate to the risk or scale of change, such as routine inflationary adjustments. Timeliness is further hindered in some cases when departments do not provide sufficient detail in their proposals, making it harder for the Treasury to assess them effectively. The Treasury recognises the need to simplify this process and plans to introduce a standardised template to support the completeness of submissions for informed decision making. Once the Treasury has made improvements to streamline the process while maintaining appropriate safeguards for over-recovering services, they should also consider consolidating legislation and deregulating parts of the process to enable routine adjustments.

Recommendation 3. The Treasury should write to the Committee within six months setting out a detailed plan to reduce the time and complexity involved in amending fees. A new system should encourage proportionate and incremental changes to fees and not disincentivise departments from making efficiencies which would enable fixed or reduced fees. This plan should indicate when the new arrangements will be in place and include:

1. a) Standardised approval templates and timelines; risk-based consultation and oversight principles, and
2. b) A legislative review to remove unnecessary barriers and enable proportionate deregulation for routine fee amendments. It should scope the feasibility of consolidating legislation to provide for the Treasury to lay a comprehensive annual list of amendments to fees and charges for Parliament to approve, avoiding the need for secondary legislation in the future.

Charging bodies do not publish adequate or consistent information on their fees and charges to allow for effective public scrutiny and accountability. The Treasury sets out in both Managing Public Money (MPM) and the Financial Reporting Manual (FReM) the information departments must disclose on fees and charges in their annual report and accounts. However, inconsistencies between these documents creates ambiguity about what needs to be reported and the required level of detail.  Partly as a result, none of the case study bodies fully met the Treasury's disclosure requirements in 2023-24. The information in department annual reports is not sufficient for users to understand what they are being charged for; for instance cross-subsidising is not always transparent, and the aims of charges are often unclear. The presentation, depth and metrics disclosed by charging bodies vary considerably, limiting comparison and understanding for the public, the Treasury, and Parliament.

Recommendation 4. The Treasury should set, by March 2026 in time for the next financial year, proportionate and standardised reporting requirements for fee-charging public bodies. These requirements must enable effective public and Parliamentary scrutiny by ensuring at a minimum that each body publishes:

• how fees are calculated;
• the cost-recovery targets and actual performance with an explanation of any variance;
• and the breakdown of costs included in fees, clearly identifying any cross-subsidies or costs included to support other areas of government.

The Treasury's system for fees and charges has failed to incentivise cost reduction or productivity improvements, leading to missed opportunities to improve services. Where charged services aim to recover all costs, any potential savings would be passed on to the fee-payers, while the risk associated with business change remains with the charging body. This discourages investment in efficiencies and innovation in areas such as digital transformation. However, DVLA is an exception, holding fees at 2014 levels by absorbing inflation through digitisation of its services, while also improving service quality. The Treasury recognises the potential benefits of emerging technologies, such as Artificial Intelligence, to modernise legacy systems and reduce administrative overheads; however, departments need clear incentives and realistic plans to adopt such technology. The Treasury's current approach is largely reactive, relying on accounting officers to meet efficiency targets set during the spending review and the only incentive for bodies is they can reinvest the efficiency savings made. The Treasury needs to take a more proactive approach to encourage departments to pursue transformation and improve productivity within services. Revised guidance alone is unlikely to effect change unless departments are also incentivised to invest in productivity improvements to reduce costs and improve service delivery for users.

Recommendation 5. The Treasury should, by March 2026, publish a plan to embed incentives for efficiency in the fee-setting framework. This plan must include explicit incentives to reward departments that improve productivity and modernise services for users through digital transformation and innovation.