The National Audit Office (NAO) has released a new report on ‘The administrative cost of the tax system’.
With increasing tax burdens and the cost-of-living crisis bringing further cost pressures, the NAO’s report aims to increase the transparency of the costs of tax administration.
The report was also conducted to find out whether HM Revenue & Customs (HMRC) understands where its administrative costs are high and/or increasing, and how it is acting to reduce costs for taxpayers, as well as increase productivity and efficiency.
NAO used cost data provided by HMRC as the basis for its analysis. The report outlines the administrative cost of the tax system, the main cost pressures, and how the cost efficiency of the administration could be improved.
The effect on taxpayers
NAO’s report has revealed which parties are most affected by the administrative cost of the tax system – and it is safe to say that businesses are paying a heavy price.
HMRC estimates that the annual cost to businesses of complying with the tax system is £15.4 billion.
However, even this estimate is an understatement, because HMRC’s calculations have not taken all taxpayer obligations into account.
For example, the time taken by businesses to comply with tax obligations has not been researched since 2015.
Additionally, HMRC has not taken account of all costs or recent developments in HMRC services.
Frank Haskew, the head of taxation strategy at the Institute of Chartered Accountants in England and Wales (ICAEW), said: “This report highlights how the UK’s increasingly complicated tax system is saddling businesses and HMRC with extra burdens and costs, which are growing in real terms.
“The report also substantiates our concern that the cost to businesses of complying with their tax obligations is likely to be understated.
“If the Government is to make decisions around tax policy that properly takes into account the costs and burdens placed on businesses and HMRC, improved numerical analysis and statistics will be required across the board.
“A key first step would be a thorough review and update of HMRC’s standard model of the costs incurred by businesses when changes are made, which is now at least 10 years out of date.”
HMRC and taxpayers
HMRC is not without its struggles, too – £4.3 billion was the cost of collecting £829 billion of tax in 2023-24.
However, while HMRC has enjoyed increased revenue from the introduction of Making Tax Digital (MTD) and Pay as You Earn (PAYE) Income Tax Real Time Information (RTI), taxpayers face continuing difficulties.
Ultimately, the NAO report concluded: “There is evidence that the tax system is imposing increased administrative burdens on taxpayers and their intermediaries, despite the availability of digital channels.
“The system has become more complex over time, rather than more straightforward and easier to deal with.
“There are too few examples where system changes have considered the cost to taxpayers, or prioritised sufficiently those that will reduce cost.”
No wonder, then, that small- to medium-sized businesses are struggling with their tax matters – and losing trust in HMRC.
What changes need to be made?
NAO has composed 10 recommendations to help the HMRC reduce the administrative costs and complexities of the current tax system. Those that are designed to help businesses include:
- Taking a holistic view of the cost-effectiveness of the tax system when making administrative changes or advising on policy changes.
- Establishing clear responsible owners for the effectiveness and efficiency of each tax regime.
- Outlining clear and measurable objectives for simplifying the administration of the tax system, including making a measurable commitment to reduce administrative cost burdens on customers.
- Developing efficiency and productivity measures to demonstrate that it is controlling costs.
- Being more ambitious in how it can better work with intermediaries representing taxpayers to reduce system costs.
- Publishing estimates of the costs of the tax system to businesses and individuals and explore how it could identify the burdens on compliant individual taxpayers.
However, we do not know how long it will take for changes to be made.
Balancing your business’s tax burden
To prevent wasting crucial funds, businesses should take the time to comprehensively understand HMRC’s systems and digital services, minimising the risk of extra costs and delays.
An experienced accountant can explain key processes, advise on tax obligations, and assist you with all HMRC payments and communications.
At Moore Thompson, we are committed to helping you understand and manage the complexities of HMRC’s ever-changing tax system.
Contact us today to discuss how we can help you streamline your tax affairs and explore solutions to improve your tax position.