Picture this: you file your tax return correctly, yet months later, HMRC sends a surprise bill due to a system error. Or your business is owed a VAT refund, but delays in outdated IT systems leave you in limbo. These issues aren’t rare; they’re the result of HMRC’s ageing infrastructure and its struggle to handle modern tax demands.

Despite processing millions of tax returns annually, many of HMRC’s core systems predate its own formation in 2005. While initiatives like Making Tax Digital aim to improve efficiency, errors, delays, and system failures still cause frustration for taxpayers and businesses.

So why has HMRC fallen so far behind in IT investment, and what can be done to fix it? This article explores the history, consequences, and urgent need for reform in the UK’s tax system.

Historical context of HMRC’s IT systems

It’s important to put the challenges of HMRC into context and appreciate the timeline and number of IT systems that will, hopefully, be integrated into one fully connected service. The basic timeline is as follows:-

• 1970s-1980s: HMRC began adopting computerised systems to automate paper-based processes for PAYE and VAT records.
• 1994: The National Insurance Recording System 2 (NIRS2) was introduced to enhance the tracking of National Insurance contributions.
• 2005: HM Revenue and Customs (HMRC) was formed by merging the Inland Revenue and HM Customs and Excise.
• 2010: The Real-Time Information (RTI) system for PAYE was implemented, requiring employers to submit payroll data in real time.
• 2015: The Making Tax Digital (MTD) initiative was announced to modernise tax reporting. The first phase, focusing on VAT, became mandatory in April 2019.
• 2020s: HMRC has been migrating towards cloud-based systems and increasing automation using AI and machine learning. The IT strategy for 2022 to 2025 outlines plans to enhance digital services and infrastructure.

These are just the central IT systems/processes brought in over the years, and we can only imagine how many smaller internal systems have been introduced, retained, replaced or siloed. While many HMRC IT systems are struggling and, in some cases, outdated today, it’s important to recognise the ground-breaking use of IT in the early days when funding was not always an issue.

Emergence of legacy systems

In order to appreciate the challenges created by legacy systems, it’s important to understand the definition and how this impacts HMRC. The definition of a legacy system is relatively simple: a system which uses outdated/obsolete software and hardware despite new alternatives being available. 

A number of the IT systems used by HMRC predate the merger in 2005. Some of the coding is based on older programming languages, which can be difficult to upgrade, eventually forcing many IT systems to be replaced. 

There are many reasons why organisations such as HMRC (and many businesses) continue using outdated IT systems:-

• Cost constraints
• Complexity of migration
• Risk of system failures
• Regulatory and policy dependencies
• Lack of skilled personnel

The growing gap between modern tax administration needs and HMRC’s IT capabilities is causing issues in numerous areas such as:-

• Digital returns and real-time reporting
• Security vulnerabilities
• Limited scalability
• Integration issues

The further HMRC falls behind the IT investment curve, the greater the potential problems, and the cost will continue to rise.

Consequences of outdated systems

HMRC’s outdated IT systems aren’t just an internal problem; they directly impact taxpayers and businesses, causing delays, errors, and financial losses. A modern tax system should be efficient and reliable, yet system failures lead to incorrect tax bills, delayed refunds, and compliance headaches.

The cost isn’t just frustration; it’s wasted time, unexpected financial strain, and eroding trust in the system. Whether an individual faces a miscalculated tax demand or a business struggles with VAT reclaims, the burden of these failures falls squarely on taxpayers.

Now, let’s look at how these outdated systems translate into real-world inefficiencies, from administrative bottlenecks to costly mistakes for taxpayers and businesses.

Operational inefficiencies

It is common knowledge that HMRC staff are under extreme pressure to correct errors due to system limitations. This often involves using inefficient and inconsistent workarounds such as spreadsheets and manual data entry. Incompatibility between internal databases has also resulted in regular duplication of work across different departments, which delays processing times, refunds and compliance checks.

Frequent system outages and data inconsistencies are leading to growing administrative errors and a high reliance on a reduced (and costly) pool of legacy IT contractors.

The knock-on effect on different parties can be significant:-

Taxpayers

• Incorrect tax codes leading to unexpected bills or underpayments
• Delayed or inaccurate tax refunds causing financial stress
• Long waiting times for resolution due to system backlog

Businesses

• Difficulties in submitting accurate tax filings
• Delays in VAT reclaims, PAYE processing and corporation tax assessments
• Businesses facing fines or penalties due to HMRC system errors

On the flipside of the direct cost to taxpayers and businesses, billions of pounds of uncollected taxes could fund HMRC IT upgrades multiple times over.

Recent incidents attributed to system failures

Looking at the theoretical issues and potential problems is one thing, but there have been numerous real-life examples lately. These include:-

Delayed P800 tax underpayment letters

Typically, P800 letters are sent in November, giving recipients time to either appeal or arrange payment of additional taxes. Alternatively, some people may have overpaid and await a delayed rebate, leading to potentially significant financial distress. 

Apparently, HMRC IT systems could not reconcile higher-than-expected volumes of information about interest earned on savings accounts, which extended the P800 issuance period until March 2025.

Recruitment and vetting issues

An investigation by The Times revealed serious issues with HMRC’s recruitment and vetting process. Inadequate background checks saw HMRC employ individuals with troubled histories and extremist views. This has led to concerns about potential data breaches and both internal and external fraud. Of further concern, HMRC recently introduced an AI agent into the recruitment process, with many potential candidates having no human interaction in the early stages of the process.

Service accessibility concerns

As a taxpayer, business owner or professional in the financial services industry, you will likely know the difficulties of accessing HMRC telephone support. In theory, modern-day online systems should be able to support the vast majority of queries, but this is not the case for many. This leads to delays and errors, and for many, financial consequences that are outside of their control.

Recommendations for improvements

Funding alone will not fix the creaking IT systems of HMRC, as shown in the past. This grave and growing issue needs an in-depth, long-term plan protected from political influence. The fact that there are billions of pounds in unpaid taxes suggests that significant investment today will pay for itself many times over tomorrow and also create a more efficient and user-friendly tax service.

It would be wrong to suggest that HMRC has not attempted to improve the broader services and integrate/modernise IT systems, but a lack of resources results in ongoing firefights, i.e., short-term fixes. Issues today are also being played out in the public domain, impacting public trust and compliance with tax regulations.

The main recommendations for improvement include:-

• Focused investment in technology – Prioritise critical system updates and IT failures impacting taxpayers. Sufficient funding for infrastructure upgrades to enhance efficiency and improve cyber security and data integrity.
• Enhanced stakeholder engagement – Collaborate with tax professionals, businesses, and individuals to create efficient, user-friendly digital systems that reflect modern-day demands.
• Continuous monitoring and feedback – Real-time monitoring to detect system issues before they escalate, and act on feedback from individuals, businesses and tax professionals.

For some time, many in the financial services industry have been concerned about the lack of long-term visibility in investment and upgrading of HMRC legacy IT systems. Even where there appears to be a long-term plan, there is very little detail, further eroding trust in the service.

HMRC’s Systems – Conclusion

HMRC’s outdated IT systems are no longer just an inconvenience; they’re a serious risk to taxpayers, businesses, and the economy. From delayed tax refunds to costly system errors, the consequences of relying on decades-old technology add unnecessary stress to individuals and financial strain to companies.

Without urgent reform, these issues will only escalate, eroding public trust and making tax compliance even more challenging. The solution? A clear, well-funded IT upgrade strategy that prioritises efficiency, accuracy, and transparency, ensuring taxpayers get the service they deserve.

At Wilkins Southworth, we help individuals and businesses navigate HMRC’s complexities, resolve disputes, and ensure compliance in a tax system often far from perfect. If you’re struggling with tax issues or need expert guidance, get in touch today – because dealing with HMRC shouldn’t be this difficult.