UK: Small business tax evasion costing HMRC billions as ‘significant gaps’ persist

Small business tax evasion is costing the state billions of pounds of revenue a year as “significant gaps” in the UK’s tax authority’s strategies persist, a new report has revealed.

A National Audit Office (NAO) report on tax evasion has revealed that HM Revenue and Customs (HMRC) estimated a total of £5.5bn in losses from tax evasion between 2022 and 2023.

Some 81 per cent of the loss was attributed to small businesses, a 66 per surge since 2019 to 2020.

Despite HMRC’s lack of sector-specific detail, it said it has targeted campaigns at “high-risk” retailers such as sweet shops and takeaways.

Gareth Davies, head of the NAO, said the HMRC’s plan to “stop overall levels of non-compliance increasing” has “so far lacked an effective strategic response”.

The report also highlighted a need for more emphasis on widespread forms of tax evasion in the retail sector, including the avoidance of tax debt, also known as ‘phoenixism’, and electronic sales suppression.

Davies added: “Its [HMRC’s] 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.

“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.”

The HMRC has deployed more efforts to raise more online tax with Value Added Tax (VAT) liabilities among online marketplaces and overseas buyers.

However, the NAO said “significant gaps” remain as overseas firms can still falsely identify as UK-based companies.

Weaknesses have also been identified in company registration criteria, which the NAO has labelled a threat as it leaves the UK “vulnerable” to tax evasion and business fraud.

An HMRC spokesperson said: “We generated a record £843.4bn in tax revenues last year, paying for the vital public services everyone relies on. 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 £41.8bn in the last 12 months.”