Written evidence submitted by Dr Md Hosam Al Kaddour and Dr Nouha Saber (CTS0005)

Dr Mohamed Hosam Al Kaddour (PhD, SFHEA, FAIA, CMBE)

Besides his academic background, Dr Hosam is a Chartered Accountant who works as:

• Member of Professional Recognition of Educator Practice awarding panels
• Director of All Undergraduate Programs at Southampton Business School
• Reviewer in the UK Higher Education Academy and previously worked as
• Head of Teaching & Learning in the Accounting Department               

Dr Nouha Saber (PhD, FHEA, FAIA, QTS, CMBE)

Besides her academic background, Dr Nouha is a Chartered Accountant and works as:

• An Educational advisor for Southampton Business School.
• Chair of Southampton Assessment and Feedback Advisory Group.
• Programme leader for "BSc Accounting and Taxation", Southampton Business School.

Introduction

The tax regime for the United Kingdom is the backbone of the country’s revenue collection, ensuring the fair funding of public services. However, it also imposes significant costs on HM Revenue & Customs (HMRC), taxpayers, and intermediaries. These costs stem from the complexities of tax compliance, administrative burdens, and inefficiencies within the existing system. This discussion explores the key cost drivers, the most challenging aspects of tax administration, and HMRC’s efforts to modernize and reduce overall expenses.

1. Costs Imposed on the UK Tax System

1.1 Costs Incurred by HMRC

HMRC faces substantial costs related to tax collection, enforcement, and customer service. According to the 2025 National Audit Office (NAO) report, HMRC’s annual operational budget exceeds £4 billion, with a significant portion allocated to compliance monitoring and dispute resolution. Key cost drivers include:

• Customer Service Operations: HMRC struggles to manage high volumes of taxpayer inquiries via phone and correspondence, leading to rising operational costs.
• Compliance and Enforcement: Investigating tax fraud, evasion, and avoidance requires considerable resources. The tax gap is estimated at £39.8 billion (4.8% of total liabilities in 2022-23).
• IT Infrastructure: HMRC is shifting towards digital services, but legacy systems require ongoing maintenance and costly upgrades.

1.2 Compliance Costs for Taxpayers and Intermediaries

Taxpayers, particularly businesses, bear the financial burden of compliance-related expenses, including:

• Time and Labour: The complexity of tax filing and record-keeping imposes administrative burdens, especially on small and medium-sized enterprises (SMEs).
• Professional Fees: Many businesses rely on accountants and tax advisers, incurring significant fees to navigate tax obligations.
• Penalties and Late Payments: Mistakes, misunderstandings, or administrative delays lead to financial penalties, increasing the overall cost of tax compliance.

2. Challenges in Addressing the Most Costly Aspects of the System

2.1 Barriers to Digital Transformation and Modernization

While HMRC’s Making Tax Digital (MTD) initiative aims to simplify compliance, its implementation has been slow and costly due to:

• Resistance from Small Businesses: Many small enterprises lack the financial resources or digital literacy to transition smoothly.
• Outdated IT Systems: Legacy infrastructure requires significant investment to integrate modern digital solutions.
• Cybersecurity Risks: Digital tax records increase vulnerability to cyber threats, requiring robust security measures.

2.2 Customer Service Deficiencies

The 2024-25 Public Accounts Committee (PAC) report highlights critical shortcomings in HMRC’s customer service, including:

• Long Call Waiting Times: Average wait times exceed 23 minutes, with 44,000 calls cut off due to excessive queue lengths.
• Limited Digital Support: Many inquiries that could be resolved online are instead funnelled through inefficient call centres.
• Lack of Real-Time Assistance: Automated solutions are not yet advanced enough to provide personalized responses, leading to taxpayer frustration.

2.3 Tackling Tax Evasion and Avoidance

Tax evasion remains a costly challenge, particularly in the retail and self-employment sectors. The estimated tax gap of £39.8 billion reflects several ongoing issues:

• Limited Enforcement Capacity: Despite increased funding for compliance officers, HMRC struggles to investigate and prosecute cases effectively.
• Offshore Evasion: Weak international cooperation and tax loopholes contribute to continued revenue losses.
• Declining Criminal Prosecutions: The number of tax fraud prosecutions has fallen, reducing the deterrent effect.

3. Opportunities for Cost Reduction and Efficiency Improvements

3.1 Expanding Digital Services

HMRC’s 2025 digital roadmap proposes several initiatives to improve efficiency, including:

• AI-Powered Chatbots: Automating taxpayer inquiries to reduce reliance on call centres and improve response times.
• Real-Time Tax Reporting: Enhancing accuracy and reducing the need for retrospective audits.
• Integrated Digital Accounts: Providing taxpayers with a single online portal to manage all tax obligations, increasing transparency and ease of use.
• Blockchain for Tax Compliance: Exploring blockchain technology to create tamper-proof records for tax transactions, reducing fraud and improving accountability.

3.2 Strengthening Compliance Measures

HMRC has secured additional funding for compliance and debt recovery staff. Key strategies include:

• Proactive Data Analytics: Using AI to detect anomalies in tax returns early, allowing for timely intervention before non-compliance escalates.
• More Aggressive Debt Collection: Enhancing enforcement against high-value tax defaulters and improving collection efficiency.
• Targeting Offshore Accounts: Strengthening international collaboration to close tax loopholes and improve information-sharing mechanisms.
• Enhanced Collaboration with Financial Institutions: Partnering with banks and financial service providers to detect suspicious transactions and prevent tax evasion.

3.3 Streamlining Administrative Processes

To reduce burdens on taxpayers and intermediaries, HMRC is considering:

• Simplified Tax Forms: Reducing complexity in reporting requirements for businesses and individuals to improve compliance rates.
• Faster Dispute Resolution: Implementing mediation services to expedite settlements and reduce litigation costs.
• Enhanced SME Support: Offering subsidies for digital accounting software to help small businesses manage tax compliance more efficiently.
• Automated Compliance Checks: Implementing automated systems to flag potential discrepancies early and reduce resource-intensive audits.
• Reducing Paper-Based Processes: Transitioning to a fully digital tax filing and correspondence system to minimize processing delays and operational costs.

Conclusion and Recommendations

The UK tax system imposes considerable financial and administrative burdens on both HMRC and taxpayers. To reduce costs and improve efficiency, it is crucial to address compliance challenges, digital transformation barriers, and customer service shortcomings.

Key Recommendations:

1. Accelerate Digital Transformation
• Invest in AI-driven customer support to handle routine inquiries and reduce call centres’ costs.
• Expand the Making Tax Digital (MTD) initiative to include self-assessment and corporate tax filings.
• Strengthen cybersecurity measures to protect digital tax records from cyber threats.
2. Enhance Compliance and Enforcement
• Increase the recruitment of tax compliance officers to focus on high-risk sectors.
• Implement stronger penalties for deliberate tax evasion while streamlining voluntary disclosure processes.
• Develop predictive analytics to identify and prevent fraudulent activity before revenue losses occur.
3. Improve Customer Service Operations
• Introduce a call-back system to reduce frustration caused by long wait times.
• Enhance digital self-service options with interactive FAQs and AI-driven chatbots.
• Expand digital training for customer service agents to improve resolution times and taxpayer satisfaction.
4. Simplify Taxpayer Obligations
• Introduce pre-filled tax returns for individuals with straightforward financial affairs.
• Develop a standardized digital accounting format for businesses to integrate seamlessly with HMRC systems.
• Reduce unnecessary documentation requirements for VAT and corporate tax filings.
5. Strengthen Tax Evasion Countermeasures
• Establish a dedicated task force to investigate offshore tax evasion and hidden assets.
• Increase collaboration with global financial institutions to enhance tax transparency.
• Strengthen legal frameworks to ensure the swift prosecution of high-value tax fraud cases.

By addressing these key areas, HMRC can build a more efficient, transparent, and taxpayer-friendly system. This will help ensure fair tax collection and reinforce public confidence in the UK’s fiscal framework.

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February 2025