£15.4 billion annual cost of business tax compliance

The National Audit Office (NAO) has published a report on 'The administrative cost of the tax system'. It found that an increasingly complex tax system burdens government and businesses with billions in administration costs.

The National Audit Office's (NAO) report seeks to:

• Increase the transparency of the costs for all parties administering taxes.
• Establish how far HMRC understand where their administrative costs are high and/or increasing.
• Establish how HMRC are improving efficiency and productivity and reducing costs for taxpayers.

The NAO highlights several key findings. These include: 

• HMRC’s costs of administering the tax system increased by 15% (£563 million) in real terms between 2019-20 and 2023-24, with tax revenue increasing at a similar rate (16%: £113 billion). 
  • HMRC spent £4.3 billion to collect £829 billion of tax in 2023-24.
  • In 2023-24, the costliest taxes to administer, accounting for 81% of HMRC’s total cost of collection and 85% of tax revenue, were:
    • Income Tax Self Assessment (25% of total 2023-24 cost of collection).
    • VAT (21%).
    • Income Tax PAYE (18%).
    • Corporation Tax (12%).
    • National Insurance Contributions (5%). 
• While tax revenue has increased, changes to the tax system and growing numbers of taxpayers have increased HMRC’s costs for collecting tax:
  • Impact of tax policy changes: the combined effect of tax policy changes between 2022 and 2024 increases operational costs by an estimated cumulative total of £875 million over the next few years.
    • 57% of this is attributable to the introduction and running costs of Making Tax Digital for Income Tax. 
  • Taxpayer numbers: the number of Income Tax payers rose to 36.2 million in 2023-24; 14% above the 31.7 million taxpayers in 2020-21.
    • The Office for Budget Responsibility estimated in March 2024 that a further 1.6 million taxpayers will be brought into Income Tax between 2024-25 and 2027-28 as a result of tax band freezes.
  • Changes in staff numbers: HMRC staff specifically working on tax administration increased by 6% between 2019-20 and 2023-24 to 57,514 full-time equivalents with their real-term costs increasing by 9%.
    • An increase in the seniority of HMRC’s tax and wider workforce added over £100 million to salary costs between 2019-20 and 2023-24.
  • Digital costs: it cost HMRC £785 million to run its digital tax systems in 2023-24 (an 18% increase in real terms from 2019-20) and it spent £482 million on developing new systems and upgrading legacy systems.
    • Remediating legacy systems is taking HMRC longer than expected and is costing more. 
• HMRC estimate that complying with the obligations of the tax system costs businesses around £15.4 billion annually. 
  • It is noted that this estimate is an understatement, as it does not take into account all taxpayer obligations and HMRC has not carried out research since 2015.
  • This £15.4 billion is made up of:
    • £6.6 billion in fees paid to agents, accountants and other intermediaries. 
    • £4.5 billion of acquisition costs (such as new software and postage).
    • £4.3 billion of internal costs (the cost of staff carrying out the administrative work).

The NAO notes that published assessments of the impact of tax policy changes rarely estimate the costs for businesses and individuals. 

Among its ten recommendations, the NAO suggests that HMRC takes a holistic view of the cost-effectiveness of the tax system, clarifying estimated costs and benefits when placing increased requirements on taxpayers and, where appropriate, spending more when this reduces the overall cost of the system.

It should also commit to reducing administrative cost burdens on taxpayers; 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.

Useful guides on this topic

Just how are our taxes raised and spent?
How does the UK raise its taxes? How does the UK spend its tax revenue? Which taxes raise the most revenue? 

External links

NAO press release: Increasingly complex tax system burdens government and business with billions in admin costs

NAO report: The administrative cost of the tax system