Under-recovered costs of key government services lead to £340 million shortfall in income, says new NAO report

Some government bodies have not recovered the costs of providing key services including issuing passports and running the court and tribunal services through the fees they charge to citizens and businesses. This contributed to a revenue shortfall of £340 million in 2023-24, according to a new National Audit Office (NAO) report.¹

Government usually sets fees and charges to recover the costs of providing a service to avoid the need for taxpayer funding.

All seven of the services reviewed by the NAO have a cost recovery target for their services,² but they have not consistently achieved this across the past five years.³

Some of the services reviewed have persistently under-recovered costs, leading to large deficits which are more difficult to recover. For example, HM Passport Office reported a £223 million shortfall in 2023-24 and a total deficit for the last five years of £916 million.⁴ The report identified concerns about future fee increases and disparity between past and future fee payers for periodically used services as departments raise fees significantly to recoup these large losses. HM Treasury recently clarified its rules to say principles of fairness will be considered before recovery of historical deficits.

As the data used to set fees is often estimated, fees may not reflect the true costs of providing services, causing bodies to over- or under-charge.

None of the bodies fully disclosed in their annual report and accounts information related to the fees and charges the NAO reviewed, as required by HM Treasury. Limited governance oversight and central monitoring has allowed large deficits to build up without corrective action being taken.⁵

Among the services reviewed, the legislative process of updating and correcting fees also took over a year on average, delaying opportunities to make up the gap between service costs and revenue and creating funding uncertainty within government bodies as they wait for approval.⁶

Departments and public bodies are keen to set charges correctly but do not believe they have sufficient support.⁷ The report recommends HM Treasury should find ways to better help government bodies, like improving its guidance and making arrangements to share useful tools and advice.

Services which are online and automated can be cheaper to run, with HMPO, DVLA and HMCTS already improving operations by adopting a digital approach. However, some bodies use outdated IT systems which can be challenging, drive up costs and are expensive to update, and limit the opportunity for process improvement and efficiencies.

The report also highlights that persistent surpluses, as well as deficits, require closer scrutiny to ensure fairness in fee setting. To address cost recovery issues, the NAO recommends that government takes action on persistent surpluses or deficits accrued in charged services.

HM Treasury should determine how incentives can be used to drive efficiencies or improvements; standardise the process of proposing or amending fees and charges; and assess legislative options to streamline the fee amendments.

Gareth Davies, head of the NAO, said:

“Government bodies provide important services for the public and businesses, including issuing passports and driving licences, and filing company information.

“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.”

ENDS

Notes to editors

1. The seven services and their respective bodies reviewed by the National Audit Office in this report are: visa and immigration fees (UK Visas and Immigration), passport fees (HM Passport Office), court and tribunal fees (HM Courts & Tribunals Service), driving licence fees (Driver & Vehicle Licensing Agency), Company filing fees (Companies House), data protection fees (Information Commissioner's Office) and gambling licence fees (the Gambling Commission). See Figure 5 in the report for a description of the charged services examined and their cost recovery rate percentages.
2. The government usually sets fees and charges to recover the costs of providing a service. Where a government body wants to over-recover (by charging more for a service than it costs to provide it – such as providing visas), it needs ministerial approval and Parliamentary consent. For under-recovery (charging less than the cost), HM Treasury consent, and sometimes statutory authority, is required. See Figure 12 in the report for a table showing the cost recovery targets and actuals over the past five years (which includes the COVID-19pandemic years) across the charged services examined by the NAO.
3. Despite their significant deficit, HM Passport Office has made significant operational improvements in recent years, including improving customer contacts, building capacity to better manage demand, and continuing its digital transformation. 
4. The primary responsibility for ensuring compliance with fee-setting rules lies with the Accounting Officer of each department. Accounting Officers are accountable for maintainingeffective governance and internal controls, including ensuring that fees are set appropriately and information related to them is fully disclosed in line with HM Treasury guidance. Consequently, significant deficits can build up without HM Treasury, or the public body, taking corrective action. This lack of full and consistent disclosure and monitoring means that opportunities for review are limited, and that stakeholders often do not know whether charges reflect the costs of providing a service. See Figure 13 in the report for a table showing the disclosure requirements in 2023-24 across the charged services examined by the NAO.
5. See Figure 9 in the report for a chart showing the latest fee change for charged services examined by the NAO.
6. HM Treasury could learn from international examples, such as New Zealand Treasury which provides fee-setting bodies with case study examples on the process of designing, implementing and evaluating fees.