Risk areas 

The NAO has examined whether HMRC, with other parts of government, is well-placed to tackle tax evasion in high street and online retail. This includes assessing HMRC’s overall approach to tax evasion in retail, and looking at the following specific risk areas in more detail: 

• contrived business insolvency (phoenixism). This is where the owners of a company declare it to be insolvent to avoid paying tax debts and then continue the same business through a different company; 
• VAT evasion by overseas retailers selling through online marketplaces; and
• under-declaring income to reduce taxes (sales-suppression). This may involve using electronic sales suppression (ESS) software to remove transactions or to reduce their value.

What is tax evasion?

Tax evasion is defined by the NAO as taking place “where taxpayers deliberately omit or falsify information in tax returns to reduce their tax liability”. HMRC is responsible for tackling tax evasion for the taxes it administers, and works with other public bodies such as Companies House and the Insolvency Service. 

The NAO report refers to HMRC’s estimate that tax evasion costs the UK £5.5bn in 2022/23. Although this has been relatively stable in recent years, HMRC’s figures suggest that tax evasion by small businesses is increasing. For 2022/23, approximately 81% of total revenues lost to tax evasion related to small businesses, up from 66% for 2019/20. These estimates are for all sectors as HMRC does not break down the level of evasion by sector. However, HMRC has identified certain types of retailers as higher risk. For example, it has carried out campaigns in respect of takeaways and sweet shops.

The NAO’s conclusions 

The NAO reports that HMRC does not have a specific strategy to tackle tax evasion. This means that it does not have a specific focus on, or explicit objective for, its performance in this area. As a result, there has been too little emphasis on some widespread forms of tax evasion in the retail sector, including the use of ESS software and phoenixism.  

HMRC’s approach to risk assessment is specific to HMRC and gives less emphasis to the controls and mitigations available through other parts of government. HMRC estimates that phoenixism accounted for tax debt losses of £500m in 2022/23. However, the Insolvency Service disqualified only seven directors specifically for phoenixism between 2018/19 and 2023/24, out of a total of 6,274 disqualified directors. Weaknesses in company registration criteria present a significant risk as tighter requirements at Companies House and closer integration with HMRC’s systems take time to come into effect.   

HMRC took steps in 2021 to reduce the risk of overseas sellers evading VAT, making online marketplaces liable for VAT on sales from overseas retailers. However, the NAO has found that significant gaps remain in checks around online retailers, and that overseas companies can falsely present themselves as UK-based to evade VAT. 

Although HMRC makes extensive use of data to identify non-compliance, it often stops short of establishing and penalising deliberate evasion. This weakens the deterrent effect of HMRC’s compliance work. The NAO has found examples of where it believes HMRC has not yet used all the powers it has secured to tackle evasion in retail. 

The NAO’s recommendations 

Overall, the NAO believes that tighter controls and more compliance work could raise significant sums and would be cost-effective and improve value for money. The NAO reports that the average return on investment for 16 HMRC compliance projects aimed at tackling non-compliance in online retail is 19:1.  

The NAO makes a number of recommendations, including that HMRC: 

• sets a clear strategic approach to tackling tax evasion;
• takes a leadership role in working with other parts of government to tackle tax evasion; and 
• evaluates the extent to which it is using the investigatory and enforcement powers it has for tackling tax evasion. 

Further information 

• NAO report Tackling tax evasion in high street and online retail
• ICAEW’s article HMRC targets use of ESS tools