The UK is losing billions of pounds a year in revenue as tax evasion among small businesses is growing, according to a National Audit Office (NAO) report on tax evasion in retail.
HM Revenue and Customs (HMRC) lost an estimated £5.5bn due to tax evasion in 2022-23, with small businesses accounting for 81 per cent of that figure. This is up from 66 per cent in 2019-20.
While the overall level of tax evasion has stabilised in recent years, the HMRC said it has increased among small businesses.
The tax authority hasn’t yet estimated the scale of evasion by sector, but it has targeted campaigns at some high-risk retailers including takeaways and sweet shops.
Gareth Davies, head of the NAO, said HMRC lacks a specific strategy to clamp down on tax evasion, which means it lacks a focus on, or explicit objective for, its performance in this area. Instead, its aim is to stop overall levels of non-compliance increasing.
He said: “Its assessment of risks has given too little emphasis to widely used methods of evasion such as electronic sales suppression (ESS) and the abuse of the insolvency process to avoid paying tax debts known as phoenixism. It has also failed to use new powers to tackle tax evasion.”
Although HMRC estimated that phoenixism accounted for 15 per cent of its tax debt losses in 2022-23 – equivalent to more than £500m – the insolvency service disqualified only seven directors specifically for phoenixism between 2018-19 and 2023-24, out of a total of 6,274 disqualified directors.
HMRC has had success in raising more tax from online retail by making online marketplaces liable for value added tax (VAT) on sales by overseas retailers, the report read. It now estimates that it collects at least £1.5bn more in VAT a year – five times what it initially predicted.
However, the NAO said significant gaps remain in checks around online retailers, and overseas companies can falsely present themselves as UK-based to evade VAT.
The report explained: “Weaknesses in company registration criteria present another significant risk. Since 2011, when online incorporations were introduced, it has been quick and easy to set up UK companies online from anywhere in the world, leaving the UK vulnerable to tax evasion from fraudulent businesses.
“Government introduced tighter requirements at Companies House from March 2024. But some new measures will not be in force until Companies House develops the necessary systems and capability, or until further secondary legislation is in place (e.g. verifying directors’ identities).”
Mr Davies continued: “Tackling tax evasion is not a straightforward task. But real opportunities exist for HMRC to work more systematically across government to reduce it. Tighter controls and more compliance work could raise significant sums and improve value for money.”
