The true scale of tax evasion is likely far higher than HMRC estimates, with the department “not sufficiently curious” about solving the problem, a government committee has said.
The UK tax gap was £5.5bn in the 2022-23 financial year, equivalent to around 0.7 per cent of all taxes owed and considerably lower than similar economies.
But a new report from the Public Accounts Committee (PAC) has said this figure could be “just the tip of the iceberg”, after HMRC underestimated the amount of revenue a new tax on online marketplaces would raise for the Exchequer.
“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,” Sir Geoffrey Clifton-Brown MP, chair of the committee, said.
The PAC pointed to a case from January 2021, when the government introduced legislation making online marketplaces liable for VAT from overseas sellers. The tweak resulted in £1.5bn of additional tax a year – five times greater than the recoup HMRC had estimated prior to the change.
“Government needs to get a tighter grip on this issue to prevent further tax funds being lost unnecessarily,” Clifton-Brown added, calling on customs officials to investigate the issue.
Labour MP Lloyd Hatton added: “Those who intentionally evade their obligations are too often let off the hook… It seems that HMRC has no real estimate for how much the public purse loses to tax evasion, and no clear strategy to tackle it.”
Small businesses make the bulk of recouped tax
HMRC estimated that 81 per cent of tax lost due to evasion in 2023 – around £4.5bn – was recovered from small businesses, up from 66 per cent in 2020.
While HMRC have suggested this increase has been due to greater tax evasion amongst small business, Liberal Democrat Treasury spokesperson Daisy Cooper MP said SMEs have been “targeted… instead of closing these gaping enforcement gaps”.
“For years the Conservative Party all but legalised tax dodging with their failure to invest in HMRC, and now our public services are paying the price.
“People should not be paying through the nose to pick up the tab for tax dodgers any longer. The government must invest in HMRC properly and bring an end to this disgraceful situation,” Cooper said.
However, the National Audit Office has suggested HMRC hasn’t gone far enough in tackling small business tax evasion, stating that “HMRC has so far lacked an effective strategic response [to high street tax evasion].”
“There are good examples of localised campaigns targeting some retailers, but HMRC missed earlier opportunities to tackle others, potentially allowing their market share to grow,” the Office said in a report last September.
Fraudulent firms on Companies House
The PAC also raised concerns that fraudsters are using fake Companies House accounts to engage in tax evasion.
Dan Neidle, the founder of Tax Policy Associates, has uncovered a number of companies on the register who purport to be regulated with large net assets, but in fact are fake accounts and possibly part of an international money laundering operation.
“Companies House needs to screen and kick out companies that have obviously fraudulent accounts,” Neidle told Accountingweb.
Companies House has committed to reforms, including mandatory identity verification from Autumn this year. But the PAC report said that the changes “leave huge gaps” and that it is “still too easy to register companies fraudulently”.
Clifton-Brown pointed to a case involving a taxpayer in Wales, who had continued to be “bombarded” by letters from HMRC seeking unpaid tax after the PAC had previously raised their case to revenue services.
Prior to the introduction of the Economic Crime and Corporate Transparency Act (ECCTA), which granted Companies House greater powers to remove fraudulent information from the company register, Companies House estimated that between five per cent and 20 per cent of UK registered companies were fraudulent.
The PAC suggested this figure was unlikely to have changed.
“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,” Clifton-Brown said.
An HMRC spokesperson said of the tax evasion accusations: “The UK has one of the lowest reported tax gaps in the world, and we’re prioritising closing it further.
“Our risk-based approach to tackling evasion and other forms of non-compliance collected and protected £41.8bn in the last 12 months – money that goes toward public investments and services that deliver the Prime Minister’s plan for change.”
Companies House declined to comment.