Is AI the answer to HMRC’s dismal failings?

Déjà vu, which translates from French as ‘already seen’, is with us yet again with the latest PAC (Public Accounts Committee) annual report on HMRC’s performance. They have delivered a scathing verdict on the tax office and have highlighted two key areas of failure, namely that costs are rising sharply, whilst the level of performance is continuing to fall.

PAC frustration

At some distant point in the future, the House of Commons PAC will heap praise on His Majesty’s Revenue and Customs for introducing service improvements that not only benefit their customers, or taxpayers to thee and me, but also increase the tax take via major efficiencies. Unfortunately, that day appears to be receding at a rapid rate of knots with every PAC report.

Even if anyone could identify a glimmer of light at the end of the tunnel, the introduction of another bout of austerity here and financial lunacy on the other side of the pond, has rocked markets everywhere. This means that the Government desperately need an injection of funds from our tax authority, which does not appear to be likely any time soon.

A lack of confidence by business and the public

On 30th April this year, the latest PAC report was issued with the urgent heading ‘As tax collection costs rise, HMRC urged to put customers first’. Below this headline, there is a desperate call that could be echoed by every accountant for “a realistic plan to simplify the tax system and for HMRC to quickly address the rapid decline in trust taxpayers have in it.”

The chair of the committee was a long way from sounding hopeful and I’ve selected just a few of Sir Geoffrey’s comments: “HMRC needs to do much more to restore confidence in its taxpaying consumers”, “The cost of its systems are rising, trust from taxpayers declining, and the systems themselves have an ever-growing complexity”, “Customers at the moment are forced to engage with an authority that is frankly a lumbering dinosaur.” Without specifically naming any one country, he also strongly urged HMRC to learn from those countries that operate much more efficiently.

Rising costs of tax collection

With the mass closure of its public offices, HMRC no longer takes cash and only a tiny amount of cheques, so why are their costs of collecting the various revenue streams continuing to rise, when logically they should be falling?

Many leading politicians proclaim that they are intent on improving productivity and maximising the tax take, but the statistics relating to costs of tax collection are particularly damning. In the five-year period to 5th April 2024, the costs of collection increased by 15% (£563m in real terms), partly explained by over 200 policy changes during the period.

Also, despite inflation, the return per HMRC worker on tax compliance duties fell from nearly £1.5m pre-pandemic to £1.2m in 2023-24, even though HMRC employed more senior staff adding £100m to salary costs. Astonishingly, in 2023-24, HMRC spent £4.3bn on tax collection and it is estimated that the cost of tax compliance costs businesses at least £15.4bn (this does not include the cost of administering tax for the self-employed and individual taxpayers).

Could AI reverse the decline?

Given the emphasis on persuading taxpayers to utilise HMRC online services, you might be surprised to learn that 70% of the 22 million items of correspondence HMRC received in 2022-23 (letters, forms and emails) came in the post, which the committee said was “slow, costly and inconvenient”. Apparently, the underlying reason for this is largely down to severe shortcomings in HMRC’s computer systems.

As with many other aspect of life today, the magic bullet proposed by the PAC is AI. Perhaps it will cure all ills but there could be many teething problems along the way and asking an app to collect all the tax that is legally due, sounds great in theory but might not operate perfectly in practice, even when artificial intelligence is honed to perfection.

The committee stressed that it is absolutely critical HMRC learns from their roll out of flagship programme ‘Making Tax Digital’, which sends a chill down the spine of most businesses and their accountants, rather than promising hope for the future. The PAC recognised the shortcomings noting that “MTD was imposed without much consultation with businesses, with the estimated net additional administrative costs of around £300m just for businesses paying VAT.

Going forward

The PAC was also concerned that both business and public trust in HMRC is continuing to wane, year on year and urged HMRC to work with all parties and act on the feedback received, as without this approach the decline in both the trust and efficiency of our tax authority, will continue to deteriorate.

The committee in their report summary, said that without additional funding, especially to develop A!, the situation would not improve anytime soon. They concluded by suggesting that without serious support from the occupants of numbers 9 & 10 Downing Street, the downward spiral in HMRC performance will continue.

Accountant’s view

I fear that instead of taking the PAC’s remarks seriously and changing course, HMRC will continue on their ‘King Canute’ approach and there is therefore every chance that the next PAC report will be equally damning and so will the one after that ad infinitum.