HM Revenue and Customs must make sure its planned boost in compliance staff over the coming years is accompanied by a return to pre-pandemic productivity levels among officials, the National Audit Office has said.
A report from the public-spending watchdog has found that HMRC’s costs of administering the tax system increased by 15% in real terms between 2019-20 and 2023-24, with tax revenue rising fractionally higher at 16% over the same period. The report said HMRC spent £4.3bn collecting £829bn in tax in 2023-24, representing just over half a penny in expenditure for every pound raised.
It said staff administering tax cost £3.3bn in 2023-24, around three-quarters of the total cost of tax collection; and that staff costs were up 9% in real terms on 2019-20, in part due to a 6% increase in full-time-equivalent headcount from 57,943 to 61,186.
The Administrative cost of the the tax system report said the increased cost also reflected HMRC's "move towards a more highly skilled, and therefore better paid, workforce". That saw the proportion of staff in the the three lowest grades fall by 11 percentage points to 47% between March 2020 and March 2024. Conversely, the proportion of officials in higher-grade roles – from higher executive officer to senior civil service grades – increased from 41% to 53% over the same period.
However, the per-head compliance yield for officials in HMRC's Customer Compliance Group, which carries out majority of the department's compliance work, dropped over the period and has not returned to pre-pandemic levels, according to the NAO.
In the five years before the arrival of Covid-19, compliance staff achieved more than £1.4m per worker in 2023-24 prices. The NAO said that 2023-24 performance was £1.27m per worker.
The new Labour government has said it will raise £6.5bn of additional tax every year by 2029-30 and committed to recruiting 5,000 additional compliance staff to generate £2.7bn of that figure.
The NAO said hitting the target would require each new compliance worker to achieve a return of £550,000 a year – but the watchdog expressed fears that the savings target was not ambitious enough compared with the department's pre-pandemic performance.
"Unless HMRC increases levels of compliance yield per case worker, there is a risk that the expectation of lower compliance yield performance becomes the norm," it said.
Among its recommendations, the report calls on HMRC leaders to target getting compliance yield per caseworker back to pre‑pandemic levels "as soon as possible".
"Experienced caseworkers should be expected to generate yield levels closer to historic levels more quickly," it said. "HMRC should ensure that its benchmarks for good levels of compliance yield per caseworker take account of historic levels, inflation, higher returns from relevant upstream activity, increased capability from digital investment, and skills and experience of staff.
"Overall, HMRC should be aiming to increase productivity each year and ensure benchmarks are sufficiently stretching."
Elsewhere, the report questioned HMRC's awareness of the burdens that complying with the tax system places on businesses. It said that meeting the demands of the tax system cost companies an estimated £15.4bn a year, of which £6.6bn represents payments to agents, accountants, software developers and other intermediaries. It added that HMRC had not carried out research into the time taken by businesses to comply with tax obligations for the best part of a decade.
The report called on HMRC to commit to reducing administrative cost burdens on customers; develop better efficiency and productivity measures; and gain a clearer understanding of the costs and benefits of activities that stop non-compliance from occurring in the first place.
NAO head Gareth Davies said businesses and individuals deserved a "modern, resilient and effective" tax system to help them get their tax right first time.
"To get the most out of the money it spends on collecting taxes, HMRC must 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 said. "HMRC must also ensure the end-to-end system is working well for each tax."
An HMRC spokesperson said the NAO report acknowledged the department's compliance work provided "good value for money" and that it cost just 0.51p to collect every pound of tax revenue.
"We’re already improving and modernising the tax system to deliver the services our customers expect and slash red tape for business, and ongoing investment in our digital services will be vital to closing the tax gap yet further," the spokesperson said.