While HMRC hit its key targets last year while cutting staff and spending levels, a National Audit Office (NAO) report warns it is too early to tell what the long term impact of cost reduction will be on performance.
And in addition, NAO head Amyas Morse has indicated the department is to make more cuts still, saying, 'HMRC is moving from making tactical efficiency savings and quick wins towards a more strategic approach to managing its resources. The big challenge ahead will be to make more and deeper spending reductions without impairing its performance.'
The NAO report says that despite 'challenging circumstances' in 2011-12, HMRC maintained its performance in key strategic areas and improved its cost effectiveness and value for money in the year. The department made £296m in savings in 2011-12, exceeding its target by 19%.
During the same period, HMRC exceeded its overall target for collecting additional tax revenues, maintained tax collection and reduced the level of tax debt. But while it restored customer service performance from a low point in 2010-11, NAO says HMRC did not meet all of its customer service targets.
Morse said: 'In one year, HMRC has managed to deliver a third of the savings it is required to deliver over the four years of the spending period, at the same time as maintaining performance in key areas such as maintaining tax collection and reducing tax debt.'
The savings came from five key areas: staff numbers fell by around 2,400 full time equivalents, saving £140m; budgeted pay increases were frozen saving £29m; HMRC reduced the price paid for IT equipment and services saving £74m; reducing the number of buildings it used saved £26.8m; while reducing the costs of other contracts (such as postage and printing) saved around £26m.
HMRC is spending £376m in total on change projects across the four year spending review period to make sustainable savings of £411m a year by 2014-15.
But the NAO says that HMRC now expects these projects to save £162m less over the spending review period than when it last reported, in July 2011. This is partly down to improvements in forecasting, and partly because some projects took longer to start so the benefits will take longer to achieve.
HMRC now needs to make new savings of £585m a year by 2014-15 as well as maintain those savings already made. At September 2012, HMRC was on track to exceed its 2012-13 cost reduction target by £29m.
The NAO says the reduction in planned savings being delivered by change projects means that HMRC needs to find £66m more savings than it originally planned through other initiatives.
The NAO warns that as at July 2012, HMRC had not fully worked out where these additional savings in 2013-14 and beyond would come from.
