BDO comments on small business tax evasion highlighted in NAO report

A new report from the National Audit Office has highlighted weaknesses in HMRC’s approach to tackling tax evasion in small businesses – and notably among high street and online retailers.

According to HMRC’s own tax gap report, £5.5bn was lost due to tax evasion in 2022/23. The NAO report highlighted that 81% of this amount – or £4.5bn – resulted from evasion by small businesses.

Commenting on the findings of the report, Dawn Register, head of tax dispute resolution at accountancy and business advisory firm BDO said:

“The vast majority of the UK’s 5.5 million small businesses play by the rules and pay their taxes, but there is a growing tax evasion problem among some small businesses which is depriving the Exchequer of much-needed funds.

“One of the more shocking findings from the NAO report is that HMRC doesn’t have a specific strategy for clamping down on tax evasion. Given it’s costing the taxpayer some £5.5bn a year, this should be an immediate priority. Law-abiding businesses expect to see action against those who are flouting the rules so that they can compete on a level playing field.

“Recent evidence suggests HMRC is tending to focus its efforts on tackling general non-compliance amongst individuals and bigger businesses. While this might make some sense from the point of view of pulling in more lost tax into the system, it does leave a gaping enforcement gap which some small businesses are exploiting.

“While individual cases of tax evasion by small businesses may not necessarily result in a big tax loss to the Treasury, cumulatively losses amount to an eye-watering £4.5bn. HMRC needs to demonstrate that it’s getting serious about this to send a strong deterrent effect to the small business community. This will require more resources for HMRC, but for every £1 invested in compliance activity, HMRC can recover £18 in additional tax revenues.

“However, first, HMRC should set out its strategy to specifically address tax evasion and improve its ability to understand how successful it is in tackling it, learning lessons to improve future compliance activity. That strategy should encompass the hidden economy too – as some taxpayers deliberately fail to file returns and pay tax completely.

“One example of this tax evasion is through the increased use of Electronic Sales Suppression software by some retailers. These are designed to manipulate till takings by deleting sales and routing card payments through offshore banks. While HMRC has increased its compliance caseload in this area, notably through the use of its nudge letter campaigns, the NAO suggests that the tax authority is not giving sufficient priority to this issue.

“The NAO also points out that HMRC is not making full use of its powers to tackle ‘phoenixism’ - when a business declares itself insolvent to avoid paying tax debts before reforming as essentially the same company. The tax authority has started to require security against tax debts for successor companies in some cases, but this could be used more regularly.

“The NAO report illustrates that HMRC is simply not using all the new powers at its disposal. HMRC has a vast array of both civil and criminal powers to tackle tax evasion. It should make full use of these powers, and then evaluate their effectiveness, before seeking further powers. The fact that we are seeing a persistent level of tax evasion in the economy either means there are insufficient resources – or those resources are not being used effectively – or both.”

ENDS

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Contacts

Frank Shepherd
frank.x.shepherd@bdo.co.uk 
07812 463601