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Small businesses are responsible for the majority of tax evasion in the UK but Her Majesty’s Revenue and Customs has no strategy to tackle the problem, according to parliament’s spending watchdog.
In a new report focusing on tax evasion in the retail sector, the State Audit Office of Vietnam has highlighted scams involving businesses that underreport their income or file for fake bankruptcy to avoid taxes before relaunching as “phoenix” companies operating similar businesses.
“Although tax evasion is on the rise among small businesses, UK Revenue and Customs “There has been a lack of an effective strategic response so far,” said Gareth Davies, head of the NAO, which published the report on Monday.
Labour, which won power in July, has pledged to raise an extra £5bn a year for the public purse by 2029-30 by tackling tax avoidance.
HMRC estimates tax evasion by small businesses will rise to £4.4bn in 2022-23, accounting for 81 per cent of the total compared to 66 per cent in 2019-20.
The tax authority has a strategy to address all forms of non-compliance, including those due to taxpayer error, but does not specifically focus on addressing tax evasion.
“This means we are not paying enough attention to some of the most common forms of tax evasion in the retail sector,” the NAO said.
The watchdog highlighted scams such as electronic sales suppression, in which retailers use software to artificially reduce the recorded value of transactions and make revenue appear low. Other versions of the scam include creating “fake” sets of accounts or running cash registers in training mode to reduce taxable profits.
These scams cost the Treasury £450m a year, according to HMRC estimates in 2019. The agency estimates that “phoenix” companies will suffer more than £500m in tax losses in 2022-23, but the NAO notes that the Insolvency Service has only disqualified seven directors for this behaviour in the past six years.
The introduction of online company formation in 2011 also made it “easy and quick to set up a UK company online anywhere in the world, leaving the UK vulnerable to tax evasion by businesses”, the report said.
The spike in new companies registered before Companies House, the UK’s business registry, introduced stricter requirements “may indicate a higher risk of fraud in the retail sector”, the NAO said.
VAT evasion by overseas retailers selling online costs the UK an estimated £300m a year. But the NAO notes that HMRC says it has collected an extra £1.5bn a year since the 2021 changes that made online marketplaces liable for VAT from overseas sellers.
The NAO report comes after official data last month showed the number of large UK businesses being investigated by HMRC for potentially underpaying tax had risen. five-year low.
“Tackling tax evasion is not a simple task,” said Davies. “But there are real opportunities for HMRC to work more systematically across government to reduce it. Tighter controls and more compliance work could significantly raise revenue and improve value for money.”
Paul Monaghan, chief executive of the Fair Tax Foundation, said: “For too long the discussion about tax avoidance in the UK has focused on multinational businesses. Tax avoidance by small businesses is likely to have just as much, if not more, of an impact.”
HMRC said it collected a record £843bn in tax last year and worked with the Insolvency Service and the Companies House “to tackle tax evasion in retail and online services”.
“Britain has one of the lowest tax gap reported around the world, but the government is committed to further tax cuts,” the report said. “While the vast majority of businesses pay their taxes on time, we will continue to use our civil and criminal powers against the stubborn minority who refuse to play by the rules. Such action has helped us protect £41.8bn in the past 12 months.”
Additional reporting by Emma Agyemang in Copenhagen
