The National Audit Office (NAO) published a report this morning that says:
The UK is losing billions of pounds a year in revenue due to tax evasion among small businesses, which can easily exploit weaknesses in government systems, according to a new National Audit Office (NAO) report on tax evasion in retail.
As well as raising public funds, reducing tax evasion encourages a level playing field between businesses by denying evaders an unfair competitive advantage.
According to HM Revenue and Customs (HMRC), while the overall level of tax evasion has stabilised in recent years, it has increased among small businesses. The tax authority has not estimated the scale of evasion by sector, but it has targeted campaigns at some high-risk retailers including takeaways and sweet shops.
HMRC also does not have a specific strategy to clamp down on tax evasion, which means it lacks a focus on, or explicit objective for, its performance in this area. Instead, its aim is to stop overall levels of non-compliance increasing.
This means there has been too little emphasis on some widespread forms of tax evasion in the retail sector like electronic sales suppression (ESS) and abuse of the insolvency process to avoid paying tax debts (known as phoenixism).
Although HMRC estimated that phoenixism accounted for 15% of its tax debt losses in 2022-23 (equivalent to more than £500 million), 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.
HMRC has had success in raising more tax from online retail by making online marketplaces liable for Value Added Tax (VAT) on sales by overseas retailers, a move followed by other countries. It now estimates that it collects at least £1.5 billion more in VAT a year – five times what it initially predicted.
However, significant gaps remain in checks around online retailers, and overseas companies can falsely present themselves as UK-based to evade VAT.
Weaknesses in company registration criteria present another significant risk. Since 2011, when online incorporations were introduced, it has been quick and easy to set up UK companies online from anywhere in the world, leaving the UK vulnerable to tax evasion from fraudulent businesses.
Government introduced tighter requirementsat Companies House from March 2024. But some new measures will not be in force until Companies House develops the necessary systems and capability, or until further secondary legislation is in place (e.g. verifying directors' identities).
In 2022-23, there was a surge in company registrations ahead of these stricter rules being implemented. Of the registered companies declaring themselves as retailers, 42% were incorporated since January 2023 compared with 23% of companies in all sectors. This may indicate a potentially higher risk of fraud in the retail sector.
HMRC has also not yet used all the powers it has secured to tackle evasion in retail. It should evaluate the extent to which it is using these powers, establish what barriers it faces, and identify any gaps that limit the actions it can take.
Why norte this at such length? There are three reasons.
First, I have been saying all this for decades. It is good to see that it is being acknowledged.
Second, it replicates findings in the Taxing Wealth Report 2024, here and here. In both cases, the background notes contain details.
Third, crucially, this report links tax evasion to failures at Companies House, an issue I also looked at here in the Taxing Wealth Report 2024.
Fourth, the NAO suggests that HM Revenue & Customs has no strategy to address this issue, which is a dire indictment of its senior management.
HMRC needs to undertake better tax gap assessments. See my suggestions here.
And it needs to undertake tax spillover assessments. Likewise, see my suggestions here.
Then we might collect at least another £12 billion a year - and maybe rather more.
As it is, HMRC is floundering, and fair competition in the UK economy is being undermined. You could not make up a more stupid scenario when every government claims to be on the side of small business. Their actions clearly say otherwise.
And yes, I do feel someone is noticing what I am saying when I see the NAO replicating a lot of it. The effort is not in vain.
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A good blog. And another source of revenue to fill the ‘gap’!
I agree that if the state tells you it needs taxes to pay for for stuff, it should bloody well collect it properly.
Hopeless.
I have a small circle of friends and acquaintances, but many of them don’t think twice about paying big bills to tradesmen in cash and avoiding VAT, even though they are all very comfortable. (We don’t)
Indeed, so do I. It’s almost a cultural norm to accept cash in hand payments to the local plumber or builder. Fortunately, where I live, I can choose a business that is properly accountable, but in more rural areas, the local person doing your maintenance work is often a friend.
I admit I am almost never asked for cash, and always refuse it
The person who does our house maintenance jobs sometimes wants cash sometimes not (proper invoice, payment by BACS). We have had minor crises and they have sorted them and refused payment. They are a friend, and friend to half the village. Can those in rural areas afford to lose friends and reliable help? Advice, please! Thank you.
They all have to declare some income. Make sure it is yours.
May I suggest that accepting (or offering) cash payment is not, of itself, the issue. It is the expectation that a cash payment will result in a VAT-related reduction which is the problem. Paying by cash while demading a fully itemised VAT receipt may help.
Transparency International (TI-UK) has produced a report raising serious concern about the potential for corruption affecting £15Bn out of a total Covid PPE expenditure of £45Bn. Here is an excerpt from a summary of the issues on the TI-UK website. Forgive the lengthy excerpt, but I think it worth reading (or go to the Website and Report).
“The report Behind the Masks; Corruption red flags in COVID-19 public procurement (https://www.transparency.org.uk/publications/behind-masks-corruption-red-flags-covid-19-public-procurement) identifies 135 contracts that we believe carry a high risk of corruption. Altogether, these contracts represent a staggering £15.3 billion of public funds—nearly a third of all pandemic procurement by value. To put this into perspective, that figure is almost equivalent to the entire annual Home Office budget.
These figures show Whitehall departments award almost £4.1bn to suppliers with political connections to the party of government at the time. Many of these went through the infamous ‘VIP’ and ‘high priority lanes’ for PPE and testing, referred by MPs and ministers from the party of government for fast-track treatment – a substantial proportion of which were not subject to adequate due diligence checks.’
Both the systemic bias in triaging suppliers and the blanket use of non-competitive procurement – itself worth over £30 billion in total – were unique to the UK and not found elsewhere in Europe.
These procurement failures had real, damaging consequences with billions of pounds of public money wasted. The National Audit Office found that the Department for Health wrote off a total of £15bn on unused personal protective equipment (PPE), COVID tests and vaccines. This includes at least £1 billion worth of PPE, bought through the now infamous VIP lane, that were deemed unfit for use. At the same time, frontline workers were regularly left to deal with shortages, sometimes resorting to makeshift protective gear like bin bags.
The new Government’s recent announcement of a COVID corruption commissioner, charged with recovering the billions of pounds of taxpayer’s money that was lost to waste, fraud and flawed contracts during the pandemic, is a welcome step. It means we might finally be able to recoup lost public funds and seek accountability for those who broke the law.
That’s why we’re calling for relevant authorities, including the new commissioner, to prioritise investigating the 135 contracts we identify to establish the facts, secure accountability for anyone involved in wrongdoing and help us learn lessons for the future.
But most significantly, our research found those well documented cases of questionable processes are not isolated examples. These findings show a widespread and often unjustifiable suspension of procurement checks and safeguards, costing billions to the public purse, and eroding trust in political institutions.
That’s why we’re calling on the government to take action. First and foremost, we need greater transparency over how public money is spent. “.
Thanks
I decided I could not do yet another post this morning….
I saw The Grauniad article
https://www.theguardian.com/politics/article/2024/sep/09/billions-lost-from-small-retailers-in-tax-evasion-says-watchdog
As Victor Meldrew put it, ‘I Dont Believe it!’
Facilitated by Companies House!
For what its worth, I’ve had the builders in recently, most seem to use these ‘Quick Books’ type systems and paying cash mucks it all up so they really are not interested.
Depends on the size of the company.
In Florida, many small companies with proper licensure (Plumbers, Roofers, Electricians, Carpenters, Landscapers…etc…etc) basically work out of the back of their van/truck and a ‘Personal” bank account. If they are working as a sub-contractor for a General Contractor (Chartered Surveyor???) then they get a check (hard or electronic). However if they are working for a residential homeowner (and no permit is required and therefore no building inspection by local regulatory concerns) then they prefer and are more than willing to take cash.
What kind of government stops pensioners £1.4bn winter fuel payments, while enabling “billions” lost due to tax evasion, and up to £197bn in other taxes noted in a certain Taxing Wealth report. https://taxingwealth.uk/
Reply to Ian Tresman @ 1.04pm
At the request of a campaign group, I emailed my Labour MP about the removal of the winter fuel allowance to pensioners and copied him a link to the Taxing Wealth Report. I received a reply this morning advising me to apply for pension credit.
So pleased somebody in his office took the time to read my concerns and thank me for the link. Except, that didn’t happen all you get back is a bog standard response. They are a waste of space.
Sorry to hear that…
At least you got a reply. My 2 emails of 1 and 4 September have not even been acknowledged.
Name and shame that MP, and their party. Start here.
Much to agree with – ref the tax aspects.
But
“fair competition in the UK economy is being undermined”. Perhaps from the tax aspect. But the problem goes much deeper.
I’ll give one example – which is symptomatic.
https://benchdogs.co.uk/collections/mk3-rail-square-ultra-and-accessories/products/mk3-rail-square-ultra
The link goes to a UK company selling a very good product (they have quite a range). This link goes to, in my view, a better product:
https://www.banggood.com/ENJOYWOOD-Aluminum-Alloy-Track-Saw-Square-Guide-Rail-Angle-Stop-Woodworking-90-Degree-Right-Angle-Guide-Plate-Square-Cutting-Everytime-for-Makita-or-Festool-p-1937748.html
At one third of the price of the Benchdogs “Made in England”, I admit, I bought two from “Fonson”. I have some other Chinese tools all superbly made. Slowly but surely, Made in England (or Made in EU) is being eroded. The causes are multiple (money costs (remind me Chiense interest rates – for industry), energy costs, education, failures to invest the list is very very long). I guarantee, Reeves and the LINO drones are clueless both wrt tax and other matters.
I use Chinese made cameras
This week we discovered our address had been used to enable someone unknown to us to register a company and become a director. It seems companies house are unable to cross referencethe electoral register let alone set up anything more sophisticated.
I am sorry to hear that
And no one cares at Companies House
In disbelief listening to World at One radio 4 platforming what should Labour do about pensioners and the ecocnomy – of all people
Lord Jon Moynihan. Ranting on about his new book Return to Growth – basically reuce the size of the sate more and more
A quoted review –
” he shows,…. that you can either have ever greater government expenditure or you can have decent levels of growth. Contrary to cakeism, you can’t have both. Rising public-sector expenditure brings greater debt, inflation and ultimately, if it is not controlled, national bankruptcy. A smaller state which does not crowd out the private sector is better able to preside over higher economic growth, …. for those brave enough to take it. Return to Growth is an essential and compelling read for policymakers and general readers alike.2
Where does the BBC dredge up these people – and having dredged – why do they give an almost uninteruppted 10 minutes to promote this drivel?
Where is the 10 minutees for Richard Murphy, Danny Blanchflower , Prem Sikka….
Now realise Moynihan is an IEA trustee – so this is at least the second time in a few days tBBC have given endless uninterupted tirade by an IEA person -which they continue to cite as a ‘think tank’ rather than a secretly funded lobby group.
And he was a leader of Vote Leave – – such a stimulus to growth
Should complain to BBC – but is it worth the bother .
Unfortunately there is no money because the Tories spent it all so we can’t afford to employ anyone to collect taxes.
End of.
You wouldn’t make it up because no one would believe it.
Try as you might you will not plumb the depths of politicians stupidity.
Sorry. I missed an apostrophe. Put it where you think it fits; personal or general.