HM Revenue and Customs has warned that it may struggle to deliver the 2024-25 savings target it was set at the last spending review because of rising costs.
The department's latest annual report and accounts, which covers the 2023-24 financial year, says the 2021 Spending Review required it to achieve annual cost savings of £500m by 2024-25 – the last year of the SR period – to be able to meet its service standards.
HMRC says real-terms changes in the department's spending power mean that while the £500m figure can be hit, the actual magnitude of efficiencies required has increased by 43%.
"Since [2021], other factors, primarily the need to absorb inflationary pressures, have increased that efficiencies and savings challenge to £719m," the department said. "We are on track to exceed the original £500m savings ask, but the £719m is proving more challenging."
In his introduction to the annual report and accounts, HMRC permanent secretary Sir Jim Harra says the department's financial pressures are being exacerbated by a growth in the UK tax base – which he blames for "serious challenges" in delivering customer services.
"According to the latest figures from the Office for Budget Responsibility, 2.1 million people were brought into income tax as a result of frozen income tax thresholds in 2023 to 2024, with more taxpayers also having increasingly complex tax affairs," he said. "This is creating increased customer contact and new compliance risks, making it harder to meet our service standards and manage the tax gap."
The annual report and accounts showed customer-service satisfaction levels dropped between 2022-23 and last year, from 79.2% to 78.6%. The proportion of telephone callers who succeeded in reaching an HMRC adviser also dropped from 71.1% in 2022-23 to 66.4%. The department's "service standard" is 85%.
Harra said HMRC's strategy was "firmly focused" on ways to help more customers get their tax and customs right first time, rather than fixing problems after they happen, and on "supporting more customers to self-serve using online services whenever they can".
Elsewhere, the annual report and accounts shows the so-called "tax gap", which is the difference between tax believed to be owed and what is collected, is estimated at £39.8bn for 2022-23 – the most recent financial year for which figures are available. The sum represents 4.8% of tax owed, a proportional reduction on the previous year's 5.2%.
HMRC said its compliance and enforcement work generated a "compliance yield" of £41.8bn in 2023-24, up from the previous year's £34bn. It said the latest figure exceeded its target for the year of £40.5bn.
The department said it incurred £5.6bn of tax losses in 2023-24. The figure is made up of £5bn of tax debt that had to be written off for reasons such as company liquidation or personal bankruptcy and £600m of "remissions" – debt not considered to be value for money to pursue.
HMRC said 2023-24's tax losses were £1.9bn higher than in the previous year and 38% higher than the historic average between 2017 and 2020. It said the escalation was "primarily due" to an increase in insolvencies.
Last year's Autumn Statement and this year's Spring Budget saw HMRC allocated a combined £303m to boost its debt-collection work. Harra told MPs in December that the initial £163m announced in November's Autumn Statement would cover the recruitment of around 700 debt officers, although he acknowledged that not all roles would be in-house.
HMRC's 2023-24 annual report and accounts shows that total headcount at the core department dropped by more than 1,000 during the financial year: falling from 63,233 to 62,174.
Fraud-and-error losses prompt NAO cautions
National Audit Office head Gareth Davies qualified HMRC's accounts because of material levels of error and fraud in three areas: corporation tax research and development reliefs; personal tax credits; and child benefit payments.
Davies said two particular corporation tax schemes – which allow businesses to offset research and development spending against corporation tax debt – had "proved attractive to those seeking to abuse them, opening up opportunities for fraud".
Figures in the annual report and accounts showed HMRC expects the two schemes to have lost £4.1bn to fraud and error between 2020 and 2024, when final figures are available. An accompanying table showed the rate of loss related to the schemes hitting a high of 17.6% in 2021-22.
HMRC said that error and fraud in tax credits resulted in overpayments of 4.7% and underpayments of 0.6% last year, valued at £365m and £60m respectively. Both figures were a reduction on 2022-23.
Fraud and error in child benefit payments were described as amounting to 1.6% of expenditure in 2023-24, twice the rate of the previous year.
The annual report and accounts said the rate equated to overpayments of £200m. HMRC said the increase was down to a change in its estimate methodology for 2023-24.