HMRC was too hasty to cut staff before expected cost savings from a shift to digital materialised – something that should act as a cautionary tale for its current "digitisation" plans, the National Audit Office has warned.
Between 2010/11 and 2014/15, HMRC cut staff in its personal tax department from 26,000 to 15,000.
But the NAO found that in 2014 HMRC misjudged the cumulative impact of its complex transition and released too many customer service staff before completing service changes.
To offset the spending reduction, HMRC planned to increase automation of the PAYE system and move customers from traditional channels to less expensive contact through the expansion of digital services, said the report.
However, the NAO found that the quality of service provided by HMRC for personal taxpayers collapsed in 2014-15 and the first seven months of 2015-16 when average call waiting times tripled. This cost taxpayers a total of £97m as they were forced to hold.
HMRC said it had been "over-optimistic" about the cumulative impact of the change and had not built sufficient contingency into its plans.
The findings echo concerns raised over recent moves to digitise HMRC services.
Last year HMRC was granted £1.3bn by George Osborne to spend on digital investment over the next four years, which is expected to yield £1bn in extra tax revenue after 2020. In the next five years taxpayers will provide information through a live tax account rather than by completing an annual tax return.
It is hoped those "digitisation" savings will plug the £717m per year in cuts, including a headcount reduction of 21 per cent by 2019-20. Yet the Office for Budgetary Responsibility estimates those savings remain "highly uncertain".
The NAO has already reported that HMRC’s transformation will be complex, and more radical than previous change programmes.
Amyas Morse, head of the National Audit Office, said HMRC's digital strategy makes sense to the watchdog.
"This does not change the fact that they got their timing badly wrong in 2014, letting significant numbers of call handling staff go before their new approach was working reliably. This led to a collapse in service quality and forced a rapid expansion of headcount. HMRC needs to move forward carefully and get their strategy back on track while maintaining, and hopefully improving, service standards,” said Morse.
In November 2015, HMRC also announced it will close 137 local offices and replace them with 13 regional centres. ®