The Public Accounts Committee (PAC) says the true cost of tax evasion is likely to be far higher, as loopholes in the current system make it too easy for fraudulent behaviour to go unchecked.
In a report released today entitled Tax evasion in the retail sector, the committee is calling for a clear strategy to tackle tax evasion and increased powers for public bodies to address fraud.
‘Lack of curiosity’ by HMRC
More than four-fifths (81%) of tax evasion in 2023/24 could be attributed to small businesses, according to HMRC, up from 66% in 2019/20.
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 the tax office to assess the reasons behind this gap.
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According to the report, the PAC “is concerned by the lack of curiosity shown by HMRC to investigate the issue”, noting that its inquiry heard that anywhere between 5% and 20% of UK registered companies were fraudulent in 2023.
According to the PAC, despite the vast sums lost, HMRC does not have a clear objective or strategy to tackle tax evasion.
The findings come in the wake of a report from January, in which HMRC’s helpline was accused of “degrading its own service”.
‘Lack of collaboration’
The issue appears to be exacerbated by a lack of collaboration between HMRC, Companies House and the Insolvency Service.
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.
Identity verification is set to become mandatory by autumn 2025, but the PAC is concerned measures are not strong enough, as Companies House is still unable to verify the addresses of registered companies.
As an example, the PAC mentioned the case of a taxpayer in Cardiff who has been “bombarded” with letters from HMRC seeking unpaid tax as a result of businesses fraudulently registering their home address for VAT purposes.
The PAC fear this case illustrates a wider issue of HMRC’s VAT registrations processes being open to abuse, with the tax authority not exploring options to tighten controls.
‘Tip of the iceberg’
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 [been] 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.”
