£15.4bn is the estimated cost of tax compliance for UK businesses, says HMRC – but the National Audit Office warns the figure is “likely to be an understatement”
An “increasingly complex” tax system, more taxpayers and more investment in staff and IT systems at HMRC have seen the tax authority’s revenue collection costs soar by 15% between the 2019/20 and 2023/24 tax years – and businesses have been left to foot the bill.
This is according to a report published by the National Audit Office (NAO), the UK’s independent public spending watchdog.
That report – “The administrative cost of the tax system“, published on 10th February – revealed an increase of around £563m in HMRC’s revenue collection costs in the last four financial years.
Over the same period, tax revenues have increased “at a similar rate”, according to the NAO – raising questions over HMRC’s effectiveness.
The NAO has also highlighted concerns over the “significant cost burden” that businesses face in their attempts “to comply with tax rules”, such as the IR35 reforms. Similarly, “the cost of compliance work… has increased” for HMRC.
Compliance activity in the spotlight
One of the key findings from the report is that “compliance staff productivity remains below pre-pandemic levels”.
HMRC has recently defended itself against accusations that it had deliberately degraded its phone services, and the tax office has been under intense scrutiny for several years over declining service levels.
In its report, the NAO highlights that the tax system “has become more complex over time, rather than more straightforward and easier to deal with”.
This is one factor behind low productivity levels. While the NAO notes that compliance activity offers “good value for money” overall, the public spending watchdog believes “the system is not optimised”.
It also highlighted that ”there are too few examples where system changes have considered the cost to taxpayers”, such as HMRC’s decision to close a number of its customer service phone lines.
To help rebuild taxpayer confidence in the system, the NAO has recommended that HMRC develop “efficiency” measures to “increase productivity each year”.
It has also suggested the tax authority aims to “increase levels of compliance yield… with the aim to return to pre-pandemic levels of performance as soon as possible”.
Taxpayers deserve “effective” tax system
Following the report’s publication, Gareth Davies – the body’s Comptroller and Auditor General – called on HMRC to “better understand how changes to the system affect the costs it incurs in administering taxes, as well as the financial burden on individuals and businesses”.
He also suggested HMRC must “ensure the end-to-end system is working well”, concluding: “businesses and individuals deserve a modern, resilient and effective tax system to help them get their tax right the first time”.
Speaking to the Telegraph in its coverage of the NAO report, Darwin Friend of the Taxpayer’s Alliance said that the UK’s system is “already a maze of complexity and red tape”.
In its current form, the system is “piling pressure on businesses” across the country. As such, Friend called on the government to “simplify our broken tax system” in a bid to “boost jobs and growth”.
The NAO report is available in full here.
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