57th Report - Government services: Generating income

The Treasury has been too passive in its oversight of fees and charges resulting in large surpluses and deficits which unfairly impacts taxpayers and potentially future service users. The Treasury’s current oversight of fees and charges is through its spending teams and during Spending Reviews. This arrangement is ineffective, as over the five-year period from 2019–20 to 2023–24, none of the seven services 3 we looked at consistently charged the correct amount to reflect actual service costs. Notably, passports and family court fees have repeatedly missed cost-recovery targets by more than 10% for five consecutive years. Persistent imbalances between fees and costs creates risks for the resilience of public services and place a burden on taxpayers, who may need to subsidise under-recovering services. Those paying fees can be unfairly charged. For example, current users may be overcharged, or future users can face higher fees to cover accumulated deficits due to past undercharging. For instance, HM Passport Office had a significant shortfall of £223 million in 2023–24, contributing to a total deficit of £916 million over five years. The Treasury accepts that its approach has been too passive, and engagement with charging bodies is reactive rather than proactive in overseeing cost recovery. recommendation To ensure sufficient scrutiny over charged services and to support bodies to achieve their cost-recovery targets, the Treasury should: a. Introduce an annual review cycle within 12 months for all charged services covering service design, consent status and implications for fairness to taxpayers and current and future service users and fee payers. b. Conduct targeted and proportionate deep-dives with bodies that have missed their cost recovery targets by more than 10% in two consecutive years and publish a time-bound recovery plan with clear milestones.

The Treasury and Department processes for changing fees are too slow and complex, which makes it harder for bodies to manage effectively their service costs and fee revenues. The case study services took an average of 63 weeks to change their fees. This results in long periods where their fees do not align with current costs, making effective cost-recovery difficult. Parliamentary scrutiny is required for secondary legislation which, while vital for accountability, adds complexity and uncertainty to the timeline that is outside of departmental control. The decision-making process is cumbersome, with multiple layers of approvals from parent departments and the Treasury which are not always proportionate to the risk or scale of change, such as routine inflationary adjustments. Timeliness is further hindered in some cases when departments do not provide sufficient detail in their proposals, making it harder for the Treasury to assess them effectively. The Treasury recognises the need to simplify this process and plans to introduce a standardised template to support the completeness of submissions for informed decision making. Once the Treasury has made improvements to 4 streamline the process while maintaining appropriate safeguards for over- recovering services, they should also consider consolidating legislation and deregulating parts of the process to enable routine adjustments. recommendation The Treasury should write to the Committee within six months setting out a detailed plan to reduce the time and complexity involved in amending fees. A new system should encourage proportionate and incremental changes to fees and not disincentivise departments from making efficiencies which would enable fixed or reduced fees. This plan should indicate when the new arrangements will be in place and include: a. Standardised approval templates and timelines; risk-based consultation and oversight principles, and b. A legislative review to remove unnecessary barriers and enable pro

Charging bodies do not publish adequate or consistent information on their fees and charges to allow for effective public scrutiny and accountability. The Treasury sets out in both Managing Public Money (MPM) and the Financial Reporting Manual (FReM) the information departments must disclose on fees and charges in their annual report and accounts. However, inconsistencies between these documents creates ambiguity about what needs to be reported and the required level of detail. Partly as a result, none of the case study bodies fully met the Treasury’s disclosure requirements in 2023–24. The information in department annual reports is not sufficient for users to understand what they are being charged for; for instance cross-subsidising is not always transparent, and the aims of charges are often unclear. The presentation, depth and metrics disclosed by charging bodies vary considerably, limiting comparison and understanding for the public, the Treasury, and Parliament. recommendation The Treasury should set, by March 2026 in time for the next financial year, proportionate and standardised reporting requirements for fee-charging public bodies. These requirements must enable effective public and Parliamentary scrutiny by ensuring at a minimum that each body publishes: • how fees are calculated; 5 • the cost-recovery targets and actual performance with an explanation of any variance; • and the breakdown of costs included in fees, clearly identifying any cross-subsidies or costs included to support other areas of government.

The Treasury’s system for fees and charges has failed to incentivise cost reduction or productivity improvements, leading to missed opportunities to improve services. Where charged services aim to recover all costs, any potential savings would be passed on to the fee- payers, while the risk associated with business change remains with the charging body. This discourages investment in efficiencies and innovation in areas such as digital transformation. However, DVLA is an exception, holding fees at 2014 levels by absorbing inflation through digitisation of its services, while also improving service quality. The Treasury recognises the potential benefits of emerging technologies, such as Artificial Intelligence, to modernise legacy systems and reduce administrative overheads; however, departments need clear incentives and realistic plans to adopt such technology. The Treasury’s current approach is largely reactive, relying on accounting officers to meet efficiency targets set during the spending review and the only incentive for bodies is they can reinvest the efficiency savings made. The Treasury needs to take a more proactive approach to encourage departments to pursue transformation and improve productivity within services. Revised guidance alone is unlikely to effect change unless departments are also incentivised to invest in productivity improvements to reduce costs and improve service delivery for users. recommendation The Treasury should, by March 2026, publish a plan to embed incentives for efficiency in the fee-setting framework. This plan must include explicit incentives to reward departments that improve productivity and modernise services for users through digital transformation and innovation. 6 1 Treasury oversight of the fees and charges Introduction

On the basis of a report by the Comptroller and Auditor General, we took evidence from HM Treasury (the Treasury), the Driver and Vehicle Licensing Agency (DVLA), and Ministry of Justice (MoJ) on the financial management of fees and charges across government.1

The NAO reported that Treasury places primary reliance on individual department’s accounting officers to monitor their fees and charges. Accounting officers are responsible for maintaining effective governance and internal controls, including ensuring that fees are set appropriately and disclosed in-line with Treasury guidance.7 The Treasury highlighted that one of the challenges with this approach is that everyone is doing things in silos resulting in inconsistency across government.8 We asked the Treasury what it is looking to do to help strengthen the arrangements to improve oversight of fee setting.9 The Treasury told us it intends to do more to help accounting officers by regularly assessing and looking at the system, as well as help departments navigate it using best practice.10

The NAO highlighted that government bodies would like practical examples of how to address common operational problems, such as forecasting user demand, or when and how to reflect inflationary pressures, so they can consider options on how best to handle them.11 The Treasury recognises that charging bodies face issues and need to make trade-offs, and stated that it is important Treasury shares best practice on how to manage these from its perspective.12 The Treasury told us it has since strengthened its guidance in Chapter six of MPM, and will provide more clarity about what should be considered when looking at setting fees. The Treasury believes these 5 C&AG’s Report, para 1.4, 2 6 C&AG’s Report, para 3 7 C&AG’s Report, para 2.25 8 Qq 29, 46 9 Q 28 10 Qq 6, 26 11 C&AG’s Report, para 3.3 12 Q 48 8 improvements will also allow its spending teams to guide departments though the process with clarity on the guidance and to provide constructive challenge and timely change.13

We heard charging bodies would value more signposting of where to go for expert advice and support and to learn from others’ experience. DVLA told us that more can be done to share good practice and that it is important to get those responsible for fees together to talk about what they are doing and some of the challenges.14 We asked the Treasury, given it has oversight across all the bodies that are setting the fees and charges, how it can help them learn from each other by sharing good practice. The Treasury told us that it has recently set up a working group in the Government Finance Function to share best practice on fees and charges and to be a feedback mechanism for the Treasury. The Treasury agreed that learning from best practice is helpful in terms of setting out things that departments should consider as standard.15 Strengthening oversight to improve financial management

The NAO reported that of the seven services examined, six aimed to achieve 100% cost-recovery, but these six averaged only 88% recovery in 2023-24, leading to a shortfall of £340 million.16 The Treasury acknowledged that it has perhaps been too passive, relying primarily on accounting officers. Treasury accepted that it now needs to adopt a more systematic approach to monitoring, assessing and supporting departments in setting fees and charges. The Treasury told us it plans to improve regular assessment, transparency, efficiency and sharing best practice.17

Over the five-year period from 2019-20 to 2023-24, none of the seven government services reviewed consistently met their cost-recovery targets. Poor cost-recovery persisting over time results in a build-up of surplus and deficits in some services. Both passports and family court fees have repeatedly missed their cost-recovery targets by more than 10% each year over this five-year period.18 We asked the Treasury how it will help government bodies manage the persistent deficits and surpluses more proactively in the future. The Treasury told us that it plans to 13 Qq 26, 28, 30 14 Qq 27-28; C&AG’s Report, para 3.3 15 Qq 27, 28, 46 16 C&AG’s Report, paras 8, 2.21 17 Qq 26, 46, 18 C&AG’s Report, para 2.21 9 introduce more regular reporting, promote greater professionalism, and standardise practices to ensure a more systematic approach to fees and recovering costs.19

Significant imbalances between fees and costs pose risks to the financial resilience of public services and create unfairness for the public. The NAO reported that the passport service has been underrecovering since 2017-18 without explicit approval from Home Office Ministers or HM Treasury. This has led to a deficit of £223 million in 2023-24 and a total deficit of £916 million over the five-year period from 2019-20. However, Home Office is yet to agree a strategy or timeline with the Treasury to address their ongoing deficit.20 We asked the Treasury about the consequences of unplanned surpluses and deficits. The Treasury informed us that if departments don’t recover costs through their fees, departments need to absorb the unfunded costs within its existing budget, otherwise the cost of a particular government service will come from general taxation.21 This is unfair to taxpayers when they subsidise services that should be funded by users receiving the service.

The NAO report highlighted that persistent imbalances can also create potential inequities for users. When government bodies undercharge for services, cumulative losses are often recouped through higher fees for future users. Conversely, when services over-recover, current users end up overpaying.22 We were interested to hear how the Treasury make sure users are not unfairly affected. The Treasury acknowledged this is a challenge and hopes to address this through stronger incentives for departments to encourage lower costs through efficiencies.23

The Treasury told us it manages its fees and charges through periodic spending reviews (typically every two years) and expects accounting officers to follow its guidance. The Treasury described the spending review as a mechanism for departments to assess their cost base and funding needs, including their approach to fees and charges.24 MPM requires that where ministers decide to charge less than full cost, there should be an agreed plan to achieve full cost recovery within a reasonable period, with Treasury consent.25 This principle has not been complied with or 19 Qq 60-65 20 C&AG’s Report, para 2.25 21 Qq 51-53, 55 22 C&AG’s Report, para 2.25 23 Qq 67-69 24 Qq 26,28 61-63 25 HM Treasury, Managing Public Money, June 2025 10 monitored effectively. The Treasury told us that, where bodies are under or over-charging, it will review whether they are doing that by design and with required consent, and that it will examine the implication of this.26 26 Qq 8, 40 11 2 Supporting effective financial management Streamlining the process to amend fees

The process for amending fees across government is slow and complex as certain public bodies took an average of 63 weeks, with the longest case taking over two years. This undermines financial sustainability because it makes it harder to recover costs. This delay is because bodies must first secure approval from their parent department and then the HM Treasury before preparing secondary legislation for Parliamentary scrutiny. The absence of standardised data requirements also leads to a ‘back and forth’ between departments, arm’s-length bodies and the Treasury, which prolongs the process and limits transparency over whether fees reflect the true cost of services.27

The NAO reported that the current timing of the process can result in fees that fail to keep pace with changing costs, particularly during periods of high inflation.28 The Ministry of Justice (MoJ) informed us that its latest fee change took around six months to complete and it is exploring annual reviews incorporating routine inflationary adjustments.29 The Driver and Vehicle Licensing Agency (DVLA) described a multi-stage review and approval stages before changing fees using legislation, which it explained is time-consuming. It highlighted its use of the section 102 order of the Finance (no 2) Act 1987 referenced in Managing Public Money (MPM)30, which provides a degree of flexibility to balance costs across services and reduce the need for frequent fee changes.31

The Treasury acknowledged that the decision-making process is time-consuming and disproportionate for low-risk, routine adjustments like inflation-linked increases. It told us it will introduce a standardised template, adopted from the Environment Agency’s approach, with the aim of improving completeness and consistency of departmental proposals. This change is intended to reduce delays caused by incomplete information 27 C&AG’s Report, paras 2.13, 2.14 28 C&AG’s Report para 2.14 29 Q 10 30 HM Treasury, Managing Public Money, June 2025 31 Q 12 12 and help spending teams to have better conversations with departments about the justification for different levels of fee charging.32 The DVLA and MoJ support moving towards more standardised reporting, suggesting that clearer templates would help streamline the process.33 Following the evidence session, Treasury wrote to us to share a draft of the template it plans to distribute formally via a Dear Accounting Officer letter.34

The Treasury highlighted that the legislative scheduling adds uncertainty, particularly where secondary legislation must compete for Parliamentary time. We asked if the process could be simplified without diminishing parliamentary scrutiny, such as through consolidation of primary legislation to remove the need for secondary legislation. The Treasury told us this is an option it can look into as it agrees there is scope to streamline the process in terms of speed and efficiency without compromising accountability. Another consideration the Treasury highlighted is the section 102 order of the Finance (no 2) Act 1987 that the DVLA use to pool fees together to allow for greater flexibility.35 Improving external reporting

The Treasury requires departments to disclose information on their fees and charges in their annual reports and accounts, as set out in MPM and the Financial Reporting Manual (FreM). However, the Treasury noted there are inconsistencies between these documents. This has created ambiguity about what departments must report and at what level of detail. The NAO found that disclosures vary significantly across charging bodies, for example, with some omitting key details such as cross-subsidies. We asked the Treasury what it is doing to improve oversight and strengthen disclosure requirements. The Treasury told us it plans to align MPM with the FReM and clarify expectations around departmental reporting.36

Poor reporting limits the Treasury and Parliament’s ability to monitor fees and hold departments to account. The NAO found that none of the seven services it examined complied fully with all of the Treasury’s disclosure requirements in their respective 2023-24 annual report and accounts.37 Accounting officers are responsible for ensuring fees are appropriately set and transparently reported, yet incomplete and inconsistent disclosures mean there is no clear picture of fee-setting across government. This weakens scrutiny and allows significant surpluses or deficits 32 Qq 11,28 33 Q 43 34 Letter from HM Treasury’s Permanent Secretary, 24 November 2025 35 Qq 11-15 36 Qq 28, 29; C&AG’s Report, Figure 13 37 C&AG’s Report, para 2.27 13 to build up before corrective action is taken. The Treasury told us that greater consistency and standardisation in reporting will help improve its understanding of departmental performance and better support accounting officers in fulfilling their responsibilities.38

The NAO reported the charged services it examined did not fully fulfil their disclosure requirements on areas such as unit costs, the cost-recovery targets, objectives, the extent and explanation for over or under-recovery.39 The lack of transparency affects public confidence and understanding of what they are paying for. The Treasury agree transparency is essential and that departments should clearly explain their fees, confirm it has appropriate consents, and document any changes made.40 We asked how this works in practice to ensure transparency for users that all the cost elements they are being charged for relate to the service. We noted that there is a higher risk, when fees over recover, to fund broader department priorities without disclosing this clearly to fee payers. The Treasury told us that such decisions must be made transparently, with departments clearly distinguishing between the cost of providing the core service and any supplementary policy-related charges approved by Parliament.41 Written evidence we received from Amnesty International UK and Migrant Voice also highlighted when services, such as visas, over-recover, unrelated costs should not be passed onto fee payers.42

The NAO report highlighted the importance of proportionate financial reporting requirements, particularly for smaller bodies.43 We asked how the Treasury will make sure its disclosure requirements are proportionate. The Treasury told us that it is mindful of the administrative burden, and it intends to do more to help departments improve transparency and ensure the public and Parliament have a clear understanding of how fees are set and what they cover.44 Incentivising efficiencies

Most services are designed to recover their costs, meaning any efficiencies achieved would be passed onto fee-payers rather than retained by the department. Conversely rising costs can simply be transferred to users without challenge.45 The NAO highlighted the challenges of digital 38 Q 29 39 C&AG’s Report, para 2.27 40 Qq 45, 68 41 Qq 36-40 42 GFC0001; GFC0002 43 C&AG’s Report, para 2.27 44 Qq 41, 45 45 Qq 70, 73 14 transformation which can require an upfront investment in time, money and skills. The risk of which is also borne by the charging body, and can lead to service disruption, especially if the programme is not handled well.46 This offers little incentive for departments to innovate, improve productivity or reduce operating costs. Of the seven services examined by the NAO, only one had reduced its fees in nominal terms over the past decade as a result of efficiency savings.47

Departments and arm’s-length bodies struggle to identify opportunities to improve efficiency and value for money as they do not maintain detailed cost information. The NAO found charging bodies use different methods to calculate costs including a range of cost models with varying levels of detail. As a result, some bodies do not understand how their processes contribute to costs. MPM does not set out the relative merits of different cost-modelling approaches nor does it establish clear expectations for identifying efficiencies within fee-setting regimes.48 This contributes to inconsistent approaches across government, making it difficult to understand the true costs of services and to develop robust business cases for modernising legacy systems. The MoJ told us that it completed a review of its costing methodology in 2020, where it moved from an absorption costing model to an activity-based approach. In doing this, it assessed the costs of activities associated with each fee to improve cost-attribution.49 The Treasury told us that the 2025 spending review was underpinned by efficiency, with targets to encourage cost reductions which productivity improvements will be critical to achieve. It said that its Efficiency Framework will improve departments’ consistency in reporting efficiency gains, and help it hold them to account.50 Following the evidence session, Treasury drew to our attention to the fact that the updated Efficiency Framework emphasises that, where technical efficiencies are achieved from reducing the costs of delivering a charged service, the savings can count towards the department’s efficiency target agreed with Treasury.51

We heard evidence that some organisations have demonstrated how efficiencies can be achieved. The DVLA told us it has held its fees at 2014 levels by absorbing inflation through digitisation and process redesign, while improving customer service.52 It operates under a 5% efficiency target during current spending review period and reinvests savings to strengthen services that are underperforming such as drivers’ medical assessments. 46 C&AG’s Report, para 3.16 47 C&AG’s Report, para 3.14 48 C&AG’s Report, para 2.9 49 Q 17 50 Q 74 51 Letter from HM Treasury’s Permanent Secretary, 24 November 2025; and The Government Efficiency Framework - GOV.UK, updated 24 November 2025 52 Q 14 15 The MoJ described its reform programme to modernise courts and tribunals by moving away from paper-based applications to digital services, to support progress towards full cost-recovery and improved user experience.53

The Treasury acknowledged that its system is largely reactive rather than strategic, relying on accounting officers’ general duty in respect of value for money, and periodic spending review targets to drive efficiency. It recognised the potential of emerging technologies, such as Artificial Intelligence, to reduce administrative costs and improve service delivery. The Treasury told us that departments are driven by both incentives and ongoing obligations to encourage them to adopt efficiency measures. Therefore, the Treasury stated that they intend to adopt a more proactive approach to embedding efficiency incentives across government.54 53 Qq 72-73 54 Qq 70, 74 16