Business

HM Revenue & Customs is preparing to embark on a technology spending programme worth more than £2 billion over the next two years, as long-running efforts to modernise its ageing IT estate continue to run into delays and rising costs.

According to HMRC’s latest procurement pipeline, the tax authority will begin with a large-scale data warehouse transformation programme, expected to be worth around £410 million. The contract will combine the running and modification of existing systems with the migration and eventual decommissioning of legacy data warehouse platforms.

Procurement documents state that HMRC intends to award a single contract to deliver the transformation of its legacy data warehouses, replacing no existing agreement. The legacy technology is widely understood to include SAP’s ECC Business Warehouse, which sits at the centre of HMRC’s wider enterprise resource planning overhaul.

SAP has already secured major uncontested contracts with HMRC, including a £246 million ERP modernisation deal and a separate £275 million upgrade to core tax systems, both awarded without a competitive tender.

One of the largest upcoming procurements is a £350 million contract for public cloud computing services with Amazon Web Services, replacing an existing AWS agreement of the same value. The pipeline also highlights a £306 million contract for “Digital Platforms Run and Change Products”, covering IT services to support live application services, including legacy platforms. This would replace a contract awarded to Accenture in May 2024, also valued at £306 million.

Beyond these headline projects, HMRC has a further series of large procurements planned, each exceeding £200 million. These include a £250 million mobility and workplace services contract to support staff devices and helpdesk functions; a £250 million deal for digital platforms supporting systems such as the Government Gateway and customer insight tools; and a £220 million data centre services contract.

Another significant agreement is the £214 million “Legacy – Retained HMRC Services Contract”, which HMRC has flagged as a direct award. This will replace the existing Core Business Platform Support and Maintenance Services contract, previously awarded to Capgemini for £214.5 million without a competitive process. That deal was later extended, again without competition, by a further £107 million.

In the 2024–25 financial year, HMRC spent £1.16 billion on IT and telecommunications while collecting £858.9 billion in tax revenues. Under the government’s most recent Spending Review, departments were required to undertake a Zero-Based Review of budgets, with a strong emphasis on digital transformation. As a result, HMRC has been allocated an additional £1.6 billion between 2026–27 and 2028–29 specifically to modernise its IT and data infrastructure.

However, the National Audit Office has warned that progress has been slower and more expensive than anticipated. In a report published in November 2025, the NAO said HMRC was taking longer than planned to exit legacy systems and had yet to realise the expected efficiency gains from its digital services programme.

“HMRC has not yet achieved the anticipated efficiencies from its digital services,” the watchdog said, raising questions about value for money as spending continues to escalate.

A spokesperson for HMRC said: “We’re investing in new technology so we can provide better services for our customers. We follow government procurement rules when awarding these contracts to ensure value for money for taxpayers.”

With billions more set to be spent on technology modernisation, pressure is mounting on HMRC to demonstrate tangible improvements in efficiency, service quality and system resilience as it attempts to finally move away from decades-old infrastructure.

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HMRC plans £2bn technology spending spree as legacy systems prove stubborn

UK unemployment is expected to rise to its highest level in five years in 2026 as previously announced tax increases begin to weigh on growth and hiring, according to new forecasts from the EY Item Club.

The forecasters warned that joblessness could peak at 5.2 per cent in the first half of this year, up from the current 5.1 per cent and the highest level since January 2021, as modest economic growth is constrained by tighter fiscal policy and global uncertainty.

The EY Item Club said tax rises announced by Rachel Reeves in her first Budget are set to have a more pronounced impact this year, dampening both consumer spending and business investment. Employers were already hit by a £25 billion increase in national insurance contributions last spring, a move that business groups have warned would curb hiring.

Matt Swannell, chief economic adviser to the EY Item Club, said the effects of fiscal tightening are only now starting to filter through the economy.

“Further tax rises may not be expected in 2026, but previously announced measures will begin to raise revenues,” he said. “At the same time, the government will need to rein in borrowing and keep public spending broadly flat to meet its fiscal rules.

“This tightening of fiscal policy, alongside ongoing global uncertainty, is expected to drag on UK growth over the next year or so.”

Economic growth is forecast to remain subdued. The EY Item Club now expects UK GDP to grow by 0.9 per cent this year — slightly higher than its previous estimate of 0.8 per cent, but still weaker than in 2025. Growth is then projected to recover modestly to 1.3 per cent in 2027 and 1.4 per cent in 2028.

Reeves announced a further £26 billion of tax increases in last November’s Budget, although, as with her earlier package, many of those measures will not take effect for several years. Even so, the cumulative impact of higher taxes is expected to weigh on confidence.

The EY Item Club said global risks remain a major headwind. Trade tensions and tariff disruption, particularly linked to the policies of Donald Trump, are expected to continue undermining private sector sentiment.

Financial markets were unsettled in January after Trump tested Nato alliances and announced plans to nominate Kevin Warsh as the next chair of the Federal Reserve, adding volatility to currency and commodities markets. Concerns have also lingered around inflation and public spending commitments in major economies, including Japan.

On monetary policy, the EY Item Club expects the Bank of England to hold interest rates steady at its meeting this week, before cutting again in April. Rates were reduced four times last year, falling from 4.75 per cent to 3.75 per cent.

Despite slower growth and rising unemployment, pay growth is expected to remain relatively resilient. The EY Item Club forecasts average salaries will rise by around 3 per cent this year, though that will translate into only modest improvements in living standards as higher taxes and prices continue to erode household incomes.

The outlook suggests that while a deep recession is not expected, the UK faces a period of weaker growth and rising labour market pressure as fiscal tightening and global uncertainty converge.

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UK unemployment set to hit five-year high as tax rises begin to bite, EY warns

The Bank of England is widely expected to keep interest rates on hold this week after inflation rose for the first time in five months, although markets believe the door remains open to a cut later in the spring.

Analysts expect the Bank’s Monetary Policy Committee (MPC) to vote to maintain the base rate at 3.75 per cent when it announces its decision on Thursday. The rate is already at a three-year low following four quarter-point cuts last year, which brought borrowing costs down from 5.25 per cent since July 2024.

The expected pause follows data showing inflation climbed to 3.4 per cent in December, moving further above the Bank’s 2 per cent target. While policymakers have signalled that rates are on a downward path, the latest inflation reading has strengthened the case for caution in the near term.

Markets are still pricing in two rate cuts this year, with the first potentially coming as early as March. Economists view February’s meeting as a brief pause rather than the end of the easing cycle.

The nine-member MPC has been closely divided in recent meetings, reflecting differing views over whether inflation is set to fall back quickly or remain stubbornly high. In December, the committee voted 5–4 in favour of a cut, with governor Andrew Bailey casting the deciding vote.

Analysts at UBS said they expect Bailey to back a hold this time. “After swinging the vote in favour of a cut in December, it is likely governor Bailey will vote for keeping rates on hold,” the bank said.

Meanwhile, economists at Morgan Stanley said labour market data could prove decisive for the next move. “We would expect Bailey to focus more on incoming jobs data, where we see a further uptick in unemployment. This could ultimately lead to a March cut,” they said.

EY Item Club also expects no change this week, describing a hold at 3.75 per cent as a “near-certainty”. The forecaster said the MPC is likely to signal that while another cut is possible, the rate-cutting cycle may be approaching its end.

The central bank will publish updated economic forecasts alongside Thursday’s decision, setting out its latest expectations for growth, inflation and unemployment. Bailey is also likely to face questions about recent volatility in global financial markets, driven in part by erratic tariff announcements and geopolitical tensions linked to Donald Trump.

In December, Bailey said he expected inflation to return to, or close to, the 2 per cent target by April. Price growth is forecast to ease as household bills fall following measures announced by Rachel Reeves, including the removal of some green levies and a freeze on rail fares.

For now, economists believe the Bank will opt for patience, balancing early signs of cooling inflation against lingering price pressures and uncertainty in the global economy.

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Bank of England set to hold rates as inflation rise cools cut expectations