HM Revenue & Customs is aiming to slash its IT costs by £235 million over the next four years, with the decommissioning of legacy systems playing a major part.

A National Audit Office report has audited HMRC's accounts, which show annual running costs of £3.6 billion and a target to reduce these by £1.6bn over the period to 2014-15.

At the same time as cutting back, HMRC will attempt to increase tax revenues, improving customer service and achieving reductions in welfare payments.

The "Reducing Costs in HM Revenue" report says HMRC has reported savings of £1.4 billion since 2005.

In order to achieve its future cost reductions it plans to implement 24 change projects and other measures, including savings in the provision of IT services, improvements in productivity, reduced sickness absence and headcount reductions.

Amyas Morse, head of the National Audit Office, said: “Reducing running costs by £1.6 billion over four years is a big challenge for HMRC. It is making progress but there is no contingency in its plans. To achieve value for money, it needs to better define the service it is aiming for, improve its understanding of costs, and develop its implementation plan.”

The NAO report says HMRC has "a good understanding of the main costs it incurs on staff, accommodation and IT".

An estimated £236 million could be slashed from corporate services, for example, "by using the flexibility in its estates contracts to reduce the number of offices used, and reducing IT costs through decommissioning and rationalising outdated systems", says the report.

The report states that in September 2010 HMRC used consultants to benchmark its IT costs against private enterprises and other government departments. It used the process to identify wasted IT resources, like "turning off unused software licenses".

Now Read: HMRC schedules testing for real time PAYE