As tax collection costs rise, HMRC urged to put customer first – and be ready to adopt AI
30 April 2025
PAC report calls for realistic plans to simplify tax system and for HMRC to quickly address decline in trust taxpayers have in it.
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- Public Accounts Committee
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The report warns that some of HMRC’s customer service processes are out of date.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through digital channels, and the report calls on HMRC to address the legacy IT systems that it has allowed to become out of date.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 AI has the potential to improve HMRC’s productivity and services – but the report finds that HMRC’s out of date tech will constrain its use, while making it more vulnerable to the use of AI by bad actors.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.
Chair comment
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 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.
“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 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.”