Counting the cost of the UK tax system

It would not be particularly bold or adventurous to consider that a well-designed tax system should be founded on principles of fairness, certainty, convenience, and efficiency. It should be possible for taxpayers to understand the extent of their liabilities and for tax to be collected with minimal effort on the part of the administrator. Additionally, the revenue generated should justify the costs of collection. 

The Committee of Public Accounts (CPA) recently published a report examining the costs associated with administering the UK tax system. It highlights significant increases in both the operational expenses of HM Revenue and Customs (HMRC) and the burden on taxpayers, particularly businesses.

Rising collection and compliance costs 

HMRC raised £829 billion from tax in 2023-24, while the process of collecting tax came at a cost of £4.3 billion. The return on investment, which then goes to pay for public services, is still significant. However, despite increased investment, the report confirms that productivity has declined.

Tax administration costs for businesses during the same period are estimated at £15.4 billion. In April 2025, the Federation of Small Businesses issued a report raising concerns about the significant tax compliance burden for small businesses, and the impact on the mental health of business owners. The consequences for economic growth, due to a reduction in available funds for investment and job creation, is difficult to quantify.

Clear as mud?

The report confirms that in 2022 to 2024, there were 240 tax policy changes announced at an estimated net cost of £875 million to HMRC and £913 million to businesses. Understandably, changes are often introduced quickly to plug ‘loopholes.’ However, if they are introduced in a piecemeal way that adds layers of complexity, a disproportionate burden falls on taxpayers, who then have to navigate an overly convoluted system.

It is often mentioned by advisers that the UK tax code is the longest (21,000+ pages) in the world. It is uncontroversial to suggest that the length and complexity increases the risk of costly mistakes. A significant number of tax investigations relate to inadvertent breaches of rules, which may not have arisen if they were easier to understand. If rules are unclear, opportunities for evasion or avoidance increase, as those minded to do so exploit the lack of clarity.

In what many tax advisers consider to be their Groundhog Day, the government announced the introduction of measures to ‘simplify’ the tax system in the Autumn Budget and Spring Statement. Time will tell whether 2025 will result in a meaningful improvement for businesses. 

Trust deficit

The report confirms that trust in HMRC has fallen among businesses, agents, and individuals. In January 2025, the BBC reported that HMRC denied allegations it was providing a ‘deliberately poor’ phone service in order to force taxpayers to seek help online. The decline in trust could impact on taxpayers’ willingness to engage with HMRC at an early stage when a problem arises, leading to greater issues as a result.

Tech troubles 

Work on updating HMRC’s outdated IT systems is reportedly ongoing, but has proven to be more complex than anticipated. The recently reported phishing attack, resulting in the loss of £47 million to taxpayer accounts, is clear evidence of the need for modern, robust, and secure systems.

The IMF recently reported on the use of artificial intelligence (AI) by tax authorities in other jurisdictions. In Singapore, virtual assistants answer tax questions in multiple languages. Korea makes use of an AI guide to help taxpayers file and pay taxes, while France uses AI to analyse incoming emails and drafts suggested responses for civil servants to sign off on. HMRC’s efforts in the form of the Making Tax Digital programme are not proving very popular, and has reportedly increased costs for businesses.

The related benefit from the more effective use of available tools would also mean that the time spent by HMRC staff on administrative tasks would decrease and, in an ideal world, they (with additional training) could help progress be made in regard to the significant backlog in complicated tax investigations and enquiries.

Conclusion

The CPA report underscores the need for HMRC to address rising costs, improve public trust, enhance compliance productivity, modernise IT systems, and leverage emerging technologies. By implementing these recommendations, HMRC can better serve taxpayers and ensure a more efficient and effective tax administration system, while also boosting public coffers. It is hoped that all of the above would be high up on the to-do list for the new Permanent Secretary and Chief Executive of HMRC.