Background to the report

HM Revenue & Customs (HMRC) estimates that tax evasion costs around £5 billion a year in lost revenue and is most prevalent among small businesses. HMRC is responsible for tackling tax evasion for the taxes it administers and works with other public bodies to do so.

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Tax evasion occurs where taxpayers deliberately omit or falsify information in tax returns to reduce their tax liability. As well as resulting in lost revenue, it can prevent a level playing field between businesses by giving evaders an unfair competitive advantage.

Tax evasion takes different forms and motivations can vary. New and evolving evasion risks in the retail sector (high street and online) include: fraudulent company registrations, overseas sellers evading Value Added Tax (VAT) through online marketplaces, and businesses understating sales figures or companies artificially declaring themselves insolvent and setting up a new company (known as ‘phoenixism’).

Scope of the report

This report examines whether HMRC, with other relevant parts of government, is well-placed to tackle tax evasion in high street and online retail. It covers:

  • how well HMRC understands and assesses the risk and scale of tax evasion in retail, and its strategy to tackle evasion
  • whether HMRC, with key partners, has cost-effective systems and controls to reduce the risk of tax evasion in retail
  • whether HMRC responds effectively to different methods of tax evasion in retail, and ensures lessons are learned to improve its approach

As well as assessing HMRC’s overall approach to tax evasion in retail, the report examines specific risk areas in more depth. These are: contrived business insolvency and phoenixism, VAT evasion by overseas retailers selling through online marketplaces, and sales suppression (under-declaring income to reduce taxes). In some cases, the findings may also be relevant to HMRC’s compliance work with other business sectors.

The report does not directly assess the work of local authorities to tackle tax evasion locally, HMRC’s approach to other forms of tax non-compliance, or wider government efforts in tackling crime. However, some of the findings have wider application to risks of organised crime or money laundering, or to the hidden economy.

Video summary

Senior Audit Manager, Rich Sullivan Jones, goes over our findings.

Conclusions

Tax evasion costs the UK significant sums each year in lost tax revenue.

HMRC has had success in raising more tax from online retail by making online marketplaces liable for the VAT on sales by overseas retailers, which generated more than HMRC expected. However, significant weaknesses remain in government systems which tax evaders can easily exploit, most notably around company registrations and the ability of overseas businesses to falsely represent themselves as UK-established.

Tax evasion has been growing among small businesses, and HMRC has so far lacked an effective strategic response. 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.

HMRC’s assessment of risks has given too little emphasis to widely used methods of evasion such as sales suppression and phoenixism, despite identifying that they were large and potentially growing. This means HMRC may not prioritise the most effective compliance interventions. It has also not used some new powers to tackle tax evasion. While these remain untested, they will offer less deterrence.

Tackling tax evasion is not a straightforward task, and with finite resources HMRC must work with the rest of government and other stakeholders to find the most cost-effective way to reduce evasion.

HMRC’s overarching strategy to tackle non-compliance by preventing it from occurring is sensible, but it has not followed through on this principle sufficiently for tax evasion. Real opportunities exist for HMRC to work more systematically across government to reduce evasion.

It does not measure its overall performance in responding to tax evasion, but the examples highlighted in the report suggest high returns. The likelihood is that tighter controls and more compliance work could raise significant sums and would be cost-effective and improve value for money.

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Publication details

Press release

View press release (9 Sep 2024)

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