National Audit Office highlights tax evasion in the retail sector

A recent report by the National Audit Office (NAO) has highlighted that HMRC lacks a specific strategy for tackling tax evasion and that a coordinated cross-government approach could significantly boost tax revenues.

Key risk areas identified:

1. Phoenixism: Where business owners declare insolvency to avoid tax debts but continue the same business under a new company.
2. VAT evasion by overseas retailers: Particularly those selling through online marketplaces.
3. Sales suppression: Using electronic sales suppression (ESS) software to under-report sales and reduce tax liability.

The report estimates that tax evasion cost the UK ￡5.5bn in 2022/23, with small businesses responsible for 81% of these losses, a notable increase from previous years. HMRC has particularly focused on high-risk retail sectors, such as takeaways and sweet shops.

Findings & recommendations: The NAO found that HMRC’s approach is too narrow, primarily focusing on its own risk assessment rather than leveraging other government bodies like Companies House and the Insolvency Service. For instance, while phoenixism caused ￡500m in tax losses in 2022/23, only seven directors were disqualified between 2018/19 and 2023/24 out of a total of 6,274 disqualified directors.

HMRC’s efforts to curb VAT evasion by overseas sellers, including making online marketplaces liable for VAT in 2021, have not closed all loopholes, with many overseas retailers still evading tax.

The NAO concluded that HMRC is not fully using its powers to combat tax evasion, which undermines deterrence and misses out on potential revenue. The report recommends that HMRC:

• Develop a clear strategy for tax evasion.
• Lead a coordinated effort across government to tackle evasion.
• Fully utilize its investigatory and enforcement powers.

By adopting these strategies, HMRC could significantly increase tax revenues, particularly in online retail, where compliance projects have shown a 19:1 return on investment.

Source: NAO highlights tax evasion in the retail sector | ICAEW