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HMRC IT transformation plans under strain, says NAO report

The EU transition and higher-than-expected customer demand, as well as technical debt, are among the factors that could affect HMRC’s modernisation ambitions

A report published by the National Audit Office (NAO) has raised concerns over the future of the IT transformation at HM Revenue & Customs (HMRC) as issues related to legacy, Covid-19 and Brexit place extra strain on the department.

According to the report, the tax authority had its transformation ability affected by the need to adjust and reprioritise its previous plans for transformation to reflect unforeseen developments. These include the transition away from the European Union, as well as higher-than-expected customer demand prompted by the government’s response to the crisis, such as support payments and the job retention scheme.

These developments are likely to impose additional challenges to HMRC’s 10-year modernisation plans, the report noted. The department’s strategy aims to make it easier to get tax right, provide a better experience for taxpayers and businesses, while also reducing the tax gap and wider benefits for businesses and ensuring greater resilience and responsiveness in times of crisis.

Citing previous concerns from the Public Accounts Committee (PAC) about HMRC’s access to resources to match its long-term responsibilities, needs and ambitions, the NAO stressed the PAC had recommended the tax authority review its strategy to ensure it had the means to carry out its workload in an effective manner.

Moreover, the NAO noted that HMRC said, in May 2021, that even though it was faced with challenges in the months ahead, particularly when it comes to customer service, it was confident that it would be able to cope with the budget provided while maintaining performance and transforming IT and physical estates.

In the Autumn Budget, HMRC has been allocated a settlement that provides £2.3bn for border systems across the SR21 period, through £838m over the three years to 2024-25 to complete the delivery of critical IT systems, including the new Customs Declaration Service (CDS). It also includes £107m in 2022 for the Trader Support Service (TSS), which helps traders to move goods into Northern Ireland.

On the other hand, the NAO also stressed that HMRC had significant levels of technical debt in 2019-20, the risk associated to IT legacy, which makes the department more vulnerable to cyber and security threats. The tax department reported that, in 2020-21, the age and extent of its legacy IT presented challenges for its compliance with the UK General Data Protection Regulation (GDPR) and associated data security obligations.

As a response to a PAC report that noted the department spent too much of its budget patching old systems, HMRC said in March 2021 that it was taking certain measures to address the issue. These included addressing high-priority technical debt and shifting systems to the cloud, as well as rationalising the IT estate. The department also decommissioned more than three-quarters of the 166 IT services considered to be obsolete.

According to the NAO report, HMRC is working with the Information Commissioner’s Office (ICO) to consider the implications of a 2020 review, commissioned by HMRC, into its legacy technical infrastructure, and actions to tackle the issues arising from that review.

Moreover, the report covers some aspects in relation to HMRC’s role in the government’s preparations for the end of the transition period and in supporting the Northern Ireland Protocol. In a separate report, the NAO raised concerns over the preparedness of border systems, including CDS and TSS.

The report on HMRC’s accounts for 2020-21 noted total tax revenues reached £608.8bn in 2020-21, down by £27.9bn compared to £636.7bn in 2019-20. Recognising the difficulties businesses and individuals were facing during the pandemic, the department took a “sympathetic approach” to those struggling to pay tax.

Aimed primarily at boosting tax collection and reducing fraud, HMRC’s programme Making Tax Digital was also mentioned in the report. The expectations are the reality of what the initiative delivered in terms of additional tax revenue were analysed in light of the government’s decision to slow its introduction following stakeholder feedback.

According to the NAO, by 2020-21 the programme had generated additional revenue of £265m, 45% less than the original forecast, mainly because of the economic effects of the pandemic and revised tax gap estimates.

Moreover, the report noted the cost of the Making Tax Digital for Business programme between 2016-17 and 2019-20 was £244m. The cost of the next phase of the programme was £113m in 2020-21 and will be a further £528m between 2021-22 and 2025-26.

Costs taxpayers will face as the digitisation of tax is rolled out – including cost of new software and the associated cost of integrating digital record-keeping into the business – will reach a one-off transitional cost of £173m and an administrative saving of £7m a year, relating to the approximately 1.1 million VAT taxpayers with a taxable turnover below the VAT threshold.

Further, some 4.2 million Income Tax Self Assessment businesses and landlords will have to bear a one-off transitional cost of around £1.3bn and an administrative cost of around £152m a year.

In addition, the report points out that the rise in remote working could affect HMRC’s demand for office space. However, the NAO noted there are long-standing concerns about HMRC’s non-breakable long-term property leases: 12 of the department’s 13 regional sites have leases of 20 years or more.

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