NAO runs the rule over HMRC’s administrative performance
National Audit Office provides its insights into HMRC’s value for money and areas for potential efficiency gains
NAO provides insights into HMRC’s value for money and areas for potential efficiency gains
The National Audit Office (NAO) has kicked off 2025 by publishing a report into HMRC’s operational efficiency.
The report covers the administrative cost of the tax system, the main cost pressures affecting administration, and opportunities to improve the cost efficiency of administering the system. It focuses on the four taxes which represent both the highest receipts and highest expenditure for HMRC: namely income tax, National Insurance, VAT and corporation tax.
Key findings
The NAO has commended HMRC’s value for money, as they collected £829 billion on a budget of £4.3 billion, raising £193 for every £1 spent.
HMRC have realised marginal gains compared to their pre-pandemic performance, with receipts increasing by 16 percent in real terms since 2019-20, alongside a 15 percent respective increase in costs.
Of the £829 billion raised, £41.8 billion of this was generated from HMRC’s compliance activities, with an increased focus on ‘upstream’ compliance, i.e. preventing non-compliance from occurring in the first place. Upstream yield constituted 33 percent of all compliance yield recorded in 2023-24, up from 22 percent in 2019-20. HMRC will view this as positive news, as they view upstream compliance as a more cost-effective approach to compliance.
According to HMRC figures, the compliance cost to businesses is £15.4 billion per annum, of which £6.6 billion is payments to agents, software providers and other intermediaries. However, the NAO considers this to be an underestimate.
Overall, the report paints a complex picture of increasing costs driven by two main factors. Firstly, from the tax system itself in the form of rising complexity and increasing taxpayer numbers and secondly, from collection infrastructure in the form of investment in digital services (to both introduce new systems and remediate legacy ones) and moving to a more highly skilled workforce.
Increased investment in infrastructure should enhance efficiency and productivity and according to the report there is evidence it has increased revenue, but it does not seem to be reducing running costs with customer service performance declining and efficiency targets proving difficult to meet. Overall compliance staff productivity remains below pre-pandemic levels.
The report goes further in saying there is evidence that the tax system is imposing increased administrative burdens on taxpayers despite the availability of digital channels.
Recommendations
The NAO considers that there is room for improvement, particularly through the use of “simplification, automation, upfront compliance activity and better working with tax intermediaries” which “will help to reduce its costs”.
The NAO has provided 10 recommendations for HMRC to improve their performance, which include:
- Taking a whole of view approach to the cost effectiveness of the tax system when making administrative changes or advising on policy changes. Greater clarity is needed about the estimated costs and benefits to each party when increased compliance requirements are placed on taxpayers. This should include articulating the efficiencies to be gained for the whole tax system from any redistribution of responsibilities;
- Establishing clear ownership structures for the effectiveness of each tax regime by extending the ‘Regime Owner’ system beyond its current focus on VAT;
- Establishing clear objectives to simplify the administration of the tax system with a measurable commitment to reduce administrative cost burdens on taxpayers;
- Increasing levels of compliance yield per case worker to pre-pandemic levels as soon as possible;
- Understanding the costs and benefits of ‘upstream’ compliance activity and identifying where it will further reduce the need for downstream compliance work; and
- Assessing the accuracy of estimates included in Tax Information and Impact Notes and exploring introducing more external scrutiny of their contents.
Ultimately, HMRC will need to invest the additional resources promised by the Government into not only closing the tax gap, but also at improving the overall taxpayer experience and the total cost of compliance, not just the cost to the Treasury.
NB All figures quoted above are for the year 2023-24, unless otherwise stated.
