The UK is failing to tackle tax evasion among retailers despite new government powers, according to a new report by the UK’s public spending watchdog.
The National Audit Office said the Government “lacks an effective response” to illegal tax dodgers in the sector, amid a sharp increase in the problem in recent years.
HM Revenue and Customs’ (HMRC) most recent figures, from 2022-23, estimate that £5.5 billion was lost due to tax evasion, 81% of it from small businesses, up from 66% in 2019-20.
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
Gareth Davies, NAO
But the department currently “does not have a specific strategy” to clamp down on the issue, the NAO said.
One particular issue is retailers that allow themselves to go insolvent then set up again under a new registration, so the same directors can carry on trading.
HMRC estimated the practice, known as phoenixism, accounted for 15% of its tax debt losses in 2022-23, equivalent to more than £500 million.
However, 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.
Meanwhile, new powers to issue penalties for businesses that falsely manipulate the amount of money passing through their till – known as electronic sales suppression – came into force in 2022.
The NAO said that HMRC has still not yet issued any civil penalties using the powers, but that the department told report writers that publicity around their existence has “had a deterrent effect”.
Gareth Davies, head of the NAO, said: “Although tax evasion has been growing among small businesses, HMRC has so far lacked an effective strategic response.
“Its assessment of risks has given too little emphasis to widely used methods of evasion such as sales suppression and phoenixism. It has also failed to use new powers to tackle tax evasion.
While the vast majority of businesses pay the tax that’s due, we will continue to use our civil and criminal powers against the determined minority who refuse to play by the rules
HMRC
“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.”
It comes after Labour said during the general election that it will crack down on tax avoiders to pay for its commitments on schools and the NHS.
The party said it will try to raise £5 billion a year by the end of the next Parliament by narrowing the “tax gap” – the difference between the amount of money HMRC is owed and the amount it actually receives.
Elsewhere, the NAO added that fraudulent businesses setting up on Companies House, the UK’s register of companies, is still an issue despite the Government introducing tighter requirements in March.
Suspicious companies have included directors named after cartoon characters or religious figures, while some directors on the register have been listed as being as young as zero, or older than the world’s longest-living person.
While new powers in March are supposed to allow officials to request evidence on company registrations, verify directors’ identities and remove inaccurate listings, some of the measures will still “not be fully operational until Companies House develops the necessary systems and capability”.
An HMRC spokesperson said: “The UK has one of the lowest tax gaps reported in the world, but the Government is committed to reducing it further.
“While the vast majority of businesses pay the tax that’s due, we will continue to use our civil and criminal powers against the determined minority who refuse to play by the rules. Such action helped us protect £41.8 billion in the last 12 months.
“We also work closely with partners including the Insolvency Service and Companies House to tackle evasion in retail and online services.”
An Insolvency Service spokesperson said: “We work hard to tackle phoenixism using all the investigative tools at our disposal and working closely with HM Revenue and Customs.
“This may mean on some occasions, we use our civil and criminal powers to target other misconduct connected to phoenix activity, but which is more likely to result in tougher enforcement outcomes.”
A Companies House spokesperson said: “We are using our enhanced powers in various ways to crack down on misuse of the register, including proactively sharing intelligence with law enforcement colleagues.
“As part of our ongoing programme of reform we will be introducing compulsory identity verification checks for new and existing officers and equivalents as well as those filing information with Companies House.”