UK: £5.5billion lost to tax evasion could be significant underestimate, PAC report warns

HMRC not sufficiently curious on true scale of evasion, with no strategy for tackling it.

Public Accounts Committee
The true cost of tax evasion is likely being vastly underestimated, as loopholes in the current system make it all too easy for fraudulent behaviour to go unchecked. In a report released today, the Public Accounts Committee (PAC) is calling for a clear strategy to tackle tax evasion and increased powers for public bodies to address fraud.

HMRC estimates that tax evasion cost £5.5 billion in lost revenue in 2022-23, 81% of which could be attributed to small businesses. But the introduction of legislation in 2021 making online marketplaces liable for VAT from overseas sellers led to £1.5bn in additional taxes per year, five times greater than HMRC predicted.* The PAC is therefore concerned HMRC may have underestimated the level of evasion occurring and is calling on HMRC to assess the reasons behind this gap. The report is concerned by the lack of curiosity shown by HMRC to investigate the issue, further noting that its inquiry heard that anywhere between 5% and 20% of UK registered companies were fraudulent in 2023.

Despite the vast sums lost, HMRC does not have a clear objective or strategy to tackle tax evasion. The issue appears to be exacerbated by a lack of collaboration to date between HMRC, Companies House and the Insolvency Service. The PAC is calling for HMRC to set out a clear strategy for tackling evasion and deliberate non-compliance, while noting that the current planned timeline of five to ten years to tighten company registration requirements is too far in the future.

The introduction of the Economic Crime and Corporate Transparency Act 2023 granted Companies House greater powers to clean up the company register and remove fraudulent information. With identity verification set to become mandatory by autumn 2025, it is clear steps are being taken in the right direction. But the PAC is concerned measures are not strong enough, as Companies House is still unable to verify addresses of registered companies, which the PAC fear will mean it shall remain all too easy for registrations for fraudulent means to continue.

The PAC was disappointed to learn that HMRC has continued to bombard a taxpayer in Cardiff with letters seeking unpaid tax as a result of businesses fraudulently registering their home address for VAT purposes, despite the Committee having pressed this issue for over a year. The PAC fear this case unfortunately illustrates a wider issue of HMRC’s VAT registrations processes being far too open to abuse, with the tax authority not exploring options to tighten controls.

The number of prosecutions resulting from HMRC’s criminal investigations reduced from 749 in 2018-19 to 344 in 2023-24. During the same period, the Insolvency Service disqualified just 7 directors for phoenixism. The PAC notes that it does not appear that the mechanisms in place bear down on tax evaders and rogue directors who flout insolvency rules are being used to their fullest extent.

Chair comment
Sir Geoffrey Clifton-Brown MP, Chair of the Committee, said: “It is of deep concern that the many billions in tax rightfully meant for the public purse could just be the tip of the iceberg. Not only that, but our own tax authority has not sufficiently curious with a view to accurately diagnosing the problem. Though we acknowledge the inherent difficulty of the issue, it is clear that more must be done to clamp down on fraud and root out the bad actors who are taking advantage of loopholes in the current system. It is unfair on those who abide by the rules to be undercut by those that are evading their obligations. There has to be a real willingness by those in charge of Companies House to effectively use the powers they’ve been given.

“It is heartening to know that work is being done to implement a more joined up approach across public bodies. However, large roadblocks remain in place that will inevitably slow down progress, and in some cases may stall it completely. It is also unclear how successful any effort will be in the absence of a clear strategy with measurable outcomes to tackle tax avoidance. Government needs to get a tighter grip on this issue to prevent further tax funds being lost unnecessarily.”