Full report
HMRC is under pressure.
Generational demands on key areas of public spending from defence to social care to special educational needs; a Treasury adhering to strict fiscal rules on borrowing; and a government struggling to minimize breaches of its manifesto commitment not to raise national insurance, income tax or VAT (which continue to provide three quarters of all tax revenues): all these are increasing the weight placed on improving the effectiveness of UK tax administration to meet the government’s spending plans.
Within HMRC itself, challenges are rising too. Tax and customs administration systems are increasingly facing high-volume criminal attacks, from artificial company formation to fake PAYE registrations, whose rapidity and scale are now being boosted to unprecedented levels by online automation and AI. High levels of fraud and error in R&D credits, personal tax credits and child benefits have led to the National Audit Office qualifying HMRC’s accounts every year since 2019-20. And in the next three years, with the roll-out of Make Tax Digital for Income Tax Self Assessment (MTD for ITSA), HMRC will have to deliver the biggest change in a generation in how nearly three million taxpayers do their taxes.
Reducing the £47 billion tax gap was the largest revenue pledge in the current government’s 2024 manifesto: promising £5 billion more tax revenue per year by the end of this parliament. Since the election, those figures have gone up even further. The 2024 Autumn Budget and 2025 Spring Statement promised measures to boost HMRC capacity and close ‘loopholes’ that the government expects will raise £7.5 billion in extra annual tax revenues. And although all Budgets typically promise increased tax yields from improved compliance and enforcement, the high-pressure November 2025 budget and 2026 Finance Bill are already being trailed as including new measures to tackle tax non-compliance in efforts to avoid even greater tax rises.
Yet the UK’s revenue authority is being asked to do more with less. Though promised additional staff funding of £1.7 billion over four years in the 2025 Comprehensive Spending Review (CSR), HMRC will overall see a real-term budget cut of 1.5 percent annually during this parliament. This includes annual capital spending cuts of over 24 percent: by far the deepest of any government department, and a serious challenge for an organisation tasked with a ‘digital first’ transformation requiring new infrastructure, from digital security tools to AI.
Since 2024, the government has announced extra funding for 7,900 staff: a 13 percent increase in HMRC staffing that is expected to bring an extra £5.5 billion of tax revenues by 2029-30, the third-biggest revenue-raising measure of any tax policy so far announced by this government (after increased rates of employers’ NIC and capital gains tax). Yet as figures obtained by TaxWatch show, recruitment of these new staff is already below target; the vast majority of those recruited are still years from becoming operational; and 1,500 of staff that ministers have described as “additional” are now not in fact going to be new, additional staff at all.
We shouldn’t overstate HMRC’s challenges. Figures calculated for this report show that investment in HMRC remains staggeringly good value for money: in 2024-25, every pound spent on HMRC’s compliance functions, for instance, raised or protected £23 in additional tax revenues, a figure that has been rising since 2022-23. But with compliance “return on investment” still below pre-pandemic levels, and rising dissatisfaction on the ‘customer’-facing side of HMRC’s business, it has never been more urgent to fix HMRC’s core systems, and to maintain expertise and capability amongst its staff.
This is the fourth of TaxWatch’s annual ‘State of Tax Administration’ reports, covering the 2024-25 tax year. Using published data and extensive figures obtained via Freedom of Information, the report seeks to look underneath HMRC’s latest annual reporting, to examine how HMRC’s progress in the last year compares with past performance; whether the deployment of its staff and resources matches the measured challenges of the tax system; and to track taxpayers’ experiences of tax administration.
Quantitative metrics, most of which TaxWatch has tracked since 2022 or before, are grouped against the government’s three strategic priorities for HMRC, which the new Exchequer Secretary reiterated in his speech to the HMRC Annual Conference on 16 September 2025:
- “Closing the tax gap”
- “Improving day-to-day performance and the overall customer experience”
- “Reform and modernisation of the UK’s tax and customs system”.
The report also focuses on two specific issues which have received particular public attention: tackling offshore tax evasion; and the prospects for a successful rollout of MTD for ITSA.
The vast majority of the data underlying this report come from HMRC itself, either via published statistics or on request via Freedom of Information disclosures. While there are some important areas where HMRC systematically refuses disclosure – particularly around the use of powers and penalties, and its estimates of offshore tax evasion – overall this report is testament to HMRC’s extensive transparency about its operations.
We welcome any suggestions for improvements or additions to our metrics and analysis. Please contact TaxWatch at info@taxwatchuk.org
Highlighted findings
The UK’s tax authority appears to be protecting a greater amount of revenue through compliance activity than ever before. HMRC’s ‘compliance yield’ has more than recovered from its pandemic dip: it reached £48 billion in 2024-25, up 15 percent from the previous year, and an increase of 30 percent from 2019-20 – though tax receipts themselves are up 38 percent since 2019-20. HMRC estimated that the ‘tax gap’ – the percentage of total tax due that went uncollected – was just 5.3 percent in 2023-24 (the last available year), near to its all-time low of 5.1 percent just prior to the pandemic.
Most of the increase in HMRC’s compliance yield is not growth in the amount of avoided or evaded tax that HMRC recovers, but a rise in the amount of tax non-compliance HMRC estimates it has prevented before it takes place, through ‘nudges’, taxpayer education, closing loopholes, and deterrence. These preventative measures made up 41 percent of HMRC’s estimated ‘compliance yield’ in 2024-25, compared to just 29 percent in 2020-21.
Activities chasing taxpayer non-compliance after the fact – compliance checks, investigations and prosecutions – are all still below pre-pandemic levels. Prosecutions for tax fraud in 2024-25 were less than half the number in 2019-20, though charging decisions have nearly regained pre-pandemic levels.
The amount of tax recovered or protected from offshore tax evasion is still very small. As of February 2025, HMRC’s compliance yield from tackling all forms of offshore tax evasion since 2018-19 was £1.7 billion: less than 1 percent of the total compliance yield since 2018-19. Even the introduction of global agreements which reveal UK taxpayers’ offshore bank accounts to HMRC have yielded just £821m since 2018-19. This is less than 40 percent of the tax that HMRC estimates was due from this undeclared offshore account income. Penalties introduced in the wake of the Panama Papers in 2017 to tackle enablers of offshore tax evasion have still never been used.
HMRC will not disclose the amount of tax it estimates is lost through offshore tax non-compliance. HMRC has told the Public Accounts Committee that it had no estimate for the offshore tax gap. TaxWatch has now determined that it does have an estimate of “offshore tax at risk”, but refuses to publish it.
HMRC’s efforts to tackle tax non-compliance nonetheless continue to be good value for money. Every pound that HMRC spent on recovering or preventing unpaid tax in 2024-25 generated £23. This ‘return on investment’ has been rising since 2022-23, though is still below pre-pandemic levels for most taxpayer groups. It varies widely across different taxpayer groups: in 2024-25 it was £6.48 for non-wealthy individuals, and £57.94 for large businesses. In 2024-25 HMRC recovered or protected less than 30 percent of the annual amount of tax it estimates goes unpaid by small businesses.
The debt balance – tax that has been declared or finally assessed as due from UK taxpayers, but has not yet been collected – has nearly doubled since March 2020. HMRC reduced it by just £0.6 billion in 2024-25 compared to 2022-23. At £44 billion, the total debt balance now almost equals the annual ‘tax gap’ (HMRC’s estimate for tax that goes unpaid due to tax avoidance and evasion).
HMRC is already behind schedule in delivering the government’s major effort, announced in Autumn 2024, to tackle the tax gap, offshore evasion and tax debt by recruiting 5,500 new compliance staff and 2,700 debt management staff. The government expects to raise £15.5 billion extra tax revenue from this recruitment effort over the course of this parliament. So far HMRC has recruited 744 of the promised 5,500 new compliance staff, of which only 26 are experienced staff who are already operational (0.4 percent of the promised total new staff). The rest are still in 18-month initial training. Only 1,200 of the 2,700 “additional” HMRC debt management staff promised by ministers will actually be new, additional staff. None have yet been recruited. While the number of staff working on offshore tax non-compliance is increasing, the number of offshore-dedicated staff in the Fraud Investigation Service – the department that actually investigates serious tax non-compliance – has decreased by nearly 10 percent over the last five years.
In 2024, just 52 percent of individuals who dealt with HMRC reported a good experience, the lowest level in the last eight years. Large businesses – an elite group of around 2,000 very big taxpayers given their own customer compliance managers – are the only group of taxpayers with persistently high positive experiences and opinions of HMRC. By contrast, individual taxpayers’ perceptions are worsening regarding both poor customer service and – more concerningly – fair treatment. Individual taxpayers that believe positively that “HMRC applies penalties and sanctions equally to all customers” has declined sharply from 41 percent in 2021 to 27 percent in 2024. Only 61 percent of surveyed individuals in 2024 agreed that HMRC has treated them fairly, down from 71 percent in 2021. This is lower than the figure for small businesses (76 percent), and much lower than for large businesses (87 percent).
Surveyed individuals reporting that HMRC had made errors in its dealings with them fell from 18 percent to 11 percent in 2024. Nonetheless numbers of complaints to HMRC have continued to rise. Nearly half of the 93,589 complaints that HMRC received in 2024-25 were fully or partially upheld on initial consideration, and 35 percent of complaints considered by the external Adjudicators’ Office were fully or partially upheld.
Most types of appeals of HMRC’s decisions are down, but nearly 70,000 appeals of automated/default penalties – for example, for late filing of tax returns or late payment – were lodged in 2024-25, a five-fold increase since 2019-20. Two-thirds were cancelled on appeal, indicating a major problem with HMRC accurately applying these automated/default penalties, which may affect the most vulnerable taxpayers disproportionately.
The projected costs of Making Tax Digital (MTD), HMRC’s landmark project to make self-assessment taxpayers do their taxes via software and file quarterly returns, have increased from £885 million to £1.4 billion in 2024-25. Meanwhile HMRC’s estimate for the amount of additional tax MTD will generate has been reduced in 2024-25 from £6.3 billion to £4.3 billion. Accountancy firms have questioned HMRC’s estimate that mandatory MTD obligations will add just £110 of annual costs to taxpayers.
HMRC’s ability to respond to taxpayer communications is improving but still missed HMRC’s targets in 2024-25, after a £51 million funding boost in 2024 for answering calls and correspondence. The average call waiting time fell for the first time since 2016-17 but is still four times longer than in the mid-2010s, when HMRC was receiving nearly 50 percent more calls. In 2024-25 taxpayers and their agents spent over 1,186 years collectively waiting on the phone to HMRC, and 6.5 million calls – nearly 20 percent of all calls – were unanswered.