The ‘Tackling tax evasion in high street and online retail’ report, released 9 September, revealed that evasion from small businesses – which include companies, partnerships and sole traders – increased to £4.4bn (81% of the evasion tax gap) in 2022/23 from £3.1bn (66%) in 2019/20. The report noted that high-risk retailers include takeaways and sweet shops.
However, HMRC estimates the overall amount of tax lost to evasion is equivalent to 0.7% of taxes owed – a percentage that has remained stable since 2019/20 despite the leap in estimated tax evasion from small businesses, the report found.
The NAO stated that tax evasion “occurs where taxpayers deliberately omit or falsify information in tax returns to reduce their tax liability,” and doesn’t include taxpayer error or failure to take reasonable care in providing tax information to HMRC. “The UK is losing billions of pounds a year in revenue due to tax evasion among small businesses, which can easily exploit weaknesses in government systems,” it added.
Uncertainty on true cost
Because tax evaders keep their evasion hidden, and successful discovery “depends on HMRC demonstrating that taxpayers wilfully intend to evade tax,” the actual levels of tax evasion “could be much higher or lower” than HMRC’s estimates, the report noted.
Although HMRC has not estimated the scale of tax evasion for each sector, the report continued, the tax authority’s research indicates that electronically suppressing sales figures is a widely used method for retailers looking to evade tax. Another is “phoenixism,” where companies artificially declare themselves insolvent to avoid paying tax debts, and set up a new company to continue trading.
According to HMRC estimates, phoenixism accounted for 15% of its tax debt losses in 2022/23 (equivalent to more than £500m), the NAO stated. However, the Insolvency Service disqualified only seven directors specifically for phoenixism between 2018/19 and 2023/24, it added – even though there are 6,274 disqualified directors in the UK in total.
HMRC has been more successful in raising tax from online retailers, as since January 2021 online marketplaces have been liable for VAT on sales by overseas retailers, reported the NAO. HMRC now estimates that it collects at least £1.5bn more in VAT a year – five times what it initially predicted.
However, “significant gaps remain” in checks around online retailers, and overseas companies are still able to falsely present themselves as based in the UK in order to evade VAT.
Another significant tax evasion risk comes from company registration weaknesses after online incorporations were introduced in 2011 to make company registration quick and easy, the report said.
Measures to tackle economic crime were introduced in 2024, when the government tightened Companies House requirements in March, but there was a “surge in company registrations” ahead of these stricter rules being implemented, the NAO noted. It said that 42% of the companies incorporated since January 2023 registered themselves as retailers, in comparison with 23% of companies in all sectors – a potential indicator of higher risk of retailer tax fraud.
Push for more action
Gareth Davies, head of the NAO, criticised HMRC for “so far lack[ing] an effective strategic response” to stamp out tax evasion, after the report found that HMRC aims merely “to stop overall levels of non-compliance increasing”. He added that HMRC’s assessment of risks “has given too little emphasis to widely used methods of evasion such as sales suppression and phoenixism,” and noted that the tax authority “has also failed to use new powers to tackle tax evasion”.
Cracking down on tax evasion is not straightforward, Davies said, “but real opportunities exist for HMRC to work more systematically across government to reduce it.” He recommended that “tighter controls and more compliance work could raise significant sums and improve value for money”.
