HMRC has cut contractor costs by £1m a year after replacing a decades-old outsourcing model, as ministers face pressure to find £14bn of efficiency savings across Whitehall. Whitehall risks missing Labour’s £14bn efficiency savings target unless departments stop repeatedly buying the same digital expertise from outside suppliers, according to a
Saskia Koopman
Sunday 05 July 2026 2:26 pm
HMRC has cut contractor costs by £1m a year after replacing a decades-old outsourcing model, as ministers face pressure to find £14bn of efficiency savings across Whitehall.
Whitehall risks missing Labour’s £14bn efficiency savings target unless departments stop repeatedly buying the same digital expertise from outside suppliers, according to a British technology consultancy working across government.
The warning comes as City AM can reveal HMRC has saved £1m a year after overhauling a contractor model that had supported critical Borders and Trade digital services for more than three decades.
Working with British tech firm Tecknuovo, the tax authority replaced more than 100 contractors with a service-based model supporting eight digital services used in the movement of goods into and out of the UK.
The transition was completed in three weeks, with no disruption to live services and no transition cost.
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The programme delivered an 18 per cent reduction in operating costs, generating £1m in annual savings. Onboarding times fell by 86 per cent, while all eight services achieved green status for documentation, meaning critical knowledge was captured within HMRC rather than left with individual contractors.
Meanwhile, Labour has set a target of £14bn in savings over the course of this parliament, while pressure on the public finances has intensified after the Office for National Statistics (ONS) said the current budget deficit reached £34.5bn in the first two months of the financial year – £7bn higher than the same period last year and £6bn above the Office for Budget Responsibility (OBR)’s forecast.
At the same time, the Public Accounts Committee has warned that government cannot accurately account for its consultancy spending, with estimates ranging from £1.36bn to £2.23bn a year.
“If ministers want lasting savings, transformation programmes need to leave departments genuinely stronger than they find them and not dependent on buying in contractors again for whatever the next project may be,” Katie Carruthers, managing director of Tecknuovo, told City AM.
“The issue isn’t external contractors or suppliers. There is of course a place for partnership. The issue is dependency.”
Carruthers said government has spent years buying in digital expertise rather than building and retaining capability inside the Civil Service.
That can leave departments less able to act as “an intelligent client” when procuring technology, increasing the risk that services are not bought in the most effective way.
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“When the knowledge leaves when the contractor ends, departments will find themselves paying to solve that same problem again,” she added.
Knowledge transfer
Tecknuovo calls its approach “zero dependency”, making the transfer of skills and ownership part of the contract rather than something left until handover.
“We think transformation should be measured by what’s left behind,” said Carruthers. “Knowledge transfer should be a requirement, not an end-of-contract activity.”
Under HMRC’s previous structure, more than 100 contractors supported key Borders and Trade services, with many able to leave at short notice.
Carruthers said that created “a significant and recognised risk”< because critical knowledge sat with individuals rather than the organisation.
“What we built now with HMRC belongs to them,” she said. “Their internal teams are able to operate those services independently and use suppliers where it makes sense to bring in additional capacity.”
Ministers have repeatedly presented AI as a route to better public services and lower costs, but Carruthers warned that adoption without internal capability risks creating another layer of dependency.
“There is huge potential for AI to help government deliver better services at a lower cost,” she said. “But that’s only half the challenge. You need the skills, the capability and ultimately the foundational data to make that enablement a success.”
She said the same principle applies whether departments are adopting AI, software-as-a-service products or any other emerging technology.
Carruthers stopped short of saying the £14bn savings target was unrealistic, but said it would require departments to change how they buy and retain digital capability.
“It’s a large number – many numbers add up to a large number. But project by project, programme by programme, lowering costs, increasing productivity and building longer-term capability starts to move towards that number.”
She added: “Knowledge transfer and bringing knowledge back into departments is part of what will enable government to succeed moving forward.”
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