£5.5billion lost to tax evasion could be significant underestimate, PAC report warns

The true cost of tax evasion is likely being vastly underestimated, as loopholes in the current system make it all too easy for fraudulent behaviour to go unchecked. In a report released today, the Public Accounts Committee (PAC) is calling for a clear strategy to tackle tax evasion and increased powers for public bodies to address fraud. 

HMRC estimates that tax evasion cost £5.5 billion in lost revenue in 2022-23, 81% of which could be attributed to small businesses. But the introduction of legislation in 2021 making online marketplaces liable for VAT from overseas sellers led to £1.5bn in additional taxes per year, five times greater than HMRC predicted.* The PAC is therefore concerned HMRC may have underestimated the level of evasion occurring and is calling on HMRC to assess the reasons behind this gap. The report is concerned by the lack of curiosity shown by HMRC to investigate the issue, further noting that its inquiry heard that anywhere between 5% and 20% of UK registered companies were fraudulent in 2023.  

Despite the vast sums lost, HMRC does not have a clear objective or strategy to tackle tax evasion. The issue appears to be exacerbated by a lack of collaboration to date between HMRC, Companies House and the Insolvency Service. The PAC is calling for HMRC to set out a clear strategy for tackling evasion and deliberate non-compliance, while noting that the current planned timeline of five to ten years to tighten company registration requirements is too far in the future.  

The introduction of the Economic Crime and Corporate Transparency Act 2023 granted Companies House greater powers to clean up the company register and remove fraudulent information. With identity verification set to become mandatory by autumn 2025, it is clear steps are being taken in the right direction. But the PAC is concerned measures are not strong enough, as Companies House is still unable to verify addresses of registered companies, which the PAC fear will mean it shall remain all too easy for registrations for fraudulent means to continue.  

The PAC was disappointed to learn that HMRC has continued to bombard a taxpayer in Cardiff with letters seeking unpaid tax as a result of businesses fraudulently registering their home address for VAT purposes, despite the Committee having pressed this issue for over a year. The PAC fear this case unfortunately illustrates a wider issue of HMRC's VAT registrations processes being far too open to abuse, with the tax authority not exploring options to tighten controls. 

The number of prosecutions resulting from HMRC's criminal investigations reduced from 749 in 2018-19 to 344 in 2023-24. During the same period, the Insolvency Service disqualified just 7 directors for phoenixism. The PAC notes that it does not appear that the mechanisms in place bear down on tax evaders and rogue directors who flout insolvency rules are being used to their fullest extent,    

Sir Geoffrey Clifton-Brown MP, Chair of the Committee, said: “It is of deep concern that the many billions in tax rightfully meant for the public purse could just be the tip of the iceberg. Not only that, but our own tax authority has not sufficiently curious with a view to accurately diagnosing the problem. Though we acknowledge the inherent difficulty of the issue, it is clear that more must be done to clamp down on fraud and root out the bad actors who are taking advantage of loopholes in the current system. It is unfair on those who abide by the rules to be undercut by those that are evading their obligations. There has to be a real willingness by those in charge of Companies House to effectively use the powers they've been given. 

“It is heartening to know that work is being done to implement a more joined up approach across public bodies. However, large roadblocks remain in place that will inevitably slow down progress, and in some cases may stall it completely. It is also unclear how successful any effort will be in the absence of a clear strategy with measurable outcomes to tackle tax avoidance. Government needs to get a tighter grip on this issue to prevent further tax funds being lost unnecessarily.”   

PAC report conclusions and recommendations 

We are concerned that HMRC is not sufficiently curious about the true scale of tax evasion. HMRC estimates that tax evasion cost £5.5 billion in lost revenue in 2022-23, equivalent to around 0.7% of all taxes owed. HMRC said this represents its best estimate but acknowledged that its estimate is uncertain. Tax evasion is inherently difficult to estimate as evaders aim to keep it hidden, and HMRC does not put a range on its estimate, meaning actual levels of evasion could be much higher or lower. In January 2021 government introduced legislation making online marketplaces liable for VAT from overseas sellers, resulting in £1.5 billion of additional tax a year. However, this is five times greater than HMRC estimated at the time, meaning HMRC is likely to have underestimated the scale of evasion. HMRC acknowledges that it had imperfect information at the time but could not tell us to what extent this contributed to its underestimate. We are concerned that HMRC is not sufficiently curious to understand this difference.  Companies House said that, prior to the introduction of the Economic Crime and Corporate Transparency Act (ECCTA), between 5% and 20% of UK registered companies were fraudulent. HMRC acknowledges that fraudulent company registrations create a tax risk but could not tell us the amount of tax lost as a result. 

Recommendation 1. 

a) HMRC should assess why the additional tax it now collects from online marketplaces is five times greater than it predicted. In particular, how much is due to underestimating the scale of evasion, how much is due to higher sales, and how much is due to policy change. Using this assessment, it should write to the Committee within six months with its findings, including a revision of its estimate of the amount of tax lost from VAT evasion by online retailers on online marketplaces, and any wider implications for its estimates of the tax gap. 

b) HMRC should ensure it works with Companies House and the Insolvency service to understand how the amount of corporate fraud affects the tax gap. It should lay out how it plans to do this in its Treasury Minute Response to the Committee. 

Despite significant lost revenue, HMRC does not have a clear objective or strategy to tackle tax evasion.  Rather than a separate strategy to tackle tax evasion, HMRC has an overall compliance strategy which it applies to errors and carelessness as well as to deliberate and wilful non-compliance such as evasion. But these behaviours are very different and therefore require different approaches on the part of HMRC if it is to tackle them. HMRC says it is looking at whether evasion requires its own strategy. Previously HMRC was funded to prevent the tax gap from increasing, although after receiving significant investment at Autumn Budget 2024 it now aims to reduce the overall tax gap, of which evasion is one element, and raise an additional £6.5 billion a year of tax revenue by 2029-30.  However, HMRC does not have a specific target to reduce annual losses due to evasion or other forms of deliberate non-compliance. HMRC say that no tax evasion is acceptable. Given this low tolerance for evasion, it is concerning that HMRC has not articulated a goal to reduce it. 

Recommendation 2. 

a) In its Treasury Minute response, HMRC should set out clearly what its aims are for tackling deliberate non-compliance, including tax evasion, and by how much it is seeking to reduce this by the end of this Parliament. 

b)  HMRC should establish a clear strategy for tackling tax evasion and deliberate non-compliance, in which it makes clear its future ambitions with specific, measurable and timetabled objectives. In doing this, HMRC should consider including how it plans to make use of its existing enforcement tools and introduce clear goals for how it will prosecute tax evaders. 

HMRC, Companies House and the Insolvency Service have failed to work collaboratively, missing opportunities to increase the tax take. Due to the fraudulent use of UK company registrations, contrived insolvencies and phoenixism to evade tax, HMRC, Companies House and the Insolvency Service must work closely to tackle these threats together. The introduction of ECCTA presents opportunities for all three organisations to work more closely. At Autumn Budget 2024 the government announced it would increase collaboration between HMRC, Companies House and the Insolvency Service to tackle phoenixism. The organisations say they will be developing a joint plan for closer working over the next financial year. Companies House and HMRC are discussing closer integration of systems to tighten registration requirements, including a joint registration service, but they estimate this will take between five to ten years to implement. This is too long whilst major gaps remain in checks for both company and VAT registrations. Whilst it is encouraging that all three organisations are committed to joint working and agree there are significant benefits to be had, we are disappointed that it is taking so long for this to happen. Delays in implementation decrease the additional revenue available. 

Recommendation 3.   HMRC, Companies House and the Insolvency Service should develop a plan for more effective joint working and write to the Committee within six months with further details. This should include: 

a) clear roles and responsibilities for tackling fraudulent registrations, corporate abuse and contrived insolvencies; 

b) clear objectives on tackling these threats; 

c) an assessment of how local and shared controls can be strengthened between them and operated most cost-effectively; and 

d) a more ambitious timeframe for introducing a joint registration process, given there is significant benefit to this. 

The planned reforms to the role of Companies House leave huge gaps and it is still too easy to register companies fraudulently. The Economic Crime and Corporate Transparency Act 2023 introduces significant changes to the role of Companies House, including new powers to remove inaccurate information from the company register and share data with other government bodies. Prior to the Act, Companies House had limited powers to check the validity of information provided to it, meaning it was easy for fraudsters to set up legitimate UK companies for illegitimate means. Companies House's data show that company incorporations in the UK between 2021 and 2022 greatly exceed those in other countries. Companies House is using its new powers to clean up the register, having removed 50,000 registered office addresses from the register so far. However, Companies House says the reforms will not be fully operational until March 2027. Identity verification for company directors will not be mandatory until autumn 2025. Moreover, verifying the addresses of companies on the register was not pursued under the Act, and there is no legislation in place which would allow Companies House to check addresses. Companies House acknowledges that checking addresses would help it address corporate fraud and evasion.  We are concerned that the slow rollout and lack of address verification means it will remain too easy to register companies for fraudulent means. 

Recommendation 4. 

Companies House should work with the Department for Business and Trade, and other relevant parts of government, to urgently set out the case for increased powers to verify new and existing company addresses, and develop implementation plans so checks can be in place as soon as possible if legislation is enacted. 

HMRC's VAT registrations processes are far too open to abuse, and it is not exploring options to tighten controls sufficiently. Checking whether businesses are genuinely UK established is important for VAT because online marketplaces are liable for VAT from overseas businesses selling on their platforms but not for UK established businesses. HMRC does not routinely check addresses when businesses register for VAT, but says it has confidence that its risk-based checks, combined with due diligence rules for online marketplaces, are working well. Despite this, HMRC seems unable to stop businesses registering for VAT using incorrect addresses, illustrated by the case of an individual in Cardiff who continues to receive letters seeking unpaid tax from HMRC addressed to overseas companies incorrectly registered at his residential address - despite this Committee pressing the issue for over a year. Moreover, HMRC does not appear to be actively exploring options used internationally to tighten wider controls around VAT. Notably, while it recognises transaction-based reporting would give it access to more data to manage compliance risks, it has not carried out any analysis to assess whether it would be good value for money.  

Recommendation 5. 

a) HMRC should strengthen its VAT registration controls, including by checking more addresses and stopping demands for unpaid tax going to innocent citizens who are unconnected with companies using their addresses, and working with online marketplaces to share information and intelligence effectively.  It should write to the Committee in six months to explain how it has done this.   

b) HMRC should, in its Treasury Minute response, set out its plans to explore the costs and benefits of transaction-based reporting and other controls used in other countries. 

HMRC and the Insolvency Service are not tackling tax evaders or rogue directors sufficiently, particularly for phoenixism. The number of prosecutions resulting from HMRC's criminal investigations reduced from 749 in 2018-19 to 344 in 2023-24. The previous Public Accounts Committee has raised concerns about fewer prosecutions meaning there is less of a deterrent effect for those inclined to evade tax. We are encouraged that HMRC says it wants to increase the number of prosecutions resulting from its work, and that it has increased the number of positive charging decisions it has recommended to the Crown Prosecution Service. However, we are concerned that HMRC has not issued any penalties under powers to tackle suppliers of sales suppression software it gained in 2022. The Insolvency Service disqualified just 7 directors for phoenixism between 2018-19 and 2023-24. In total it has disqualified 6,274 directors in that time. Both figures are far too low given estimates of the number of fraudulent company registrations (5% to 20% of all company registrations) and the estimated cost to the Exchequer of contrived insolvency (£500 million a year). The Insolvency Service says it has disqualified directors who carried out phoenixism for more severe offences, and it has doubled the average length of disqualification to 10 years. It says it wants to go further both in volume and increasing publicity, particularly around phoenixism, but has not committed to any targets or forecasts. 

Recommendation 6. 

HMRC and the Insolvency Service should write to the Committee within six months with a plan to bear down on tax evaders and rogue directors who flout insolvency rules. This plan should include details of:  

a) how both organisations will increase prosecutions and disqualifications;  

b) how they will better publicise cases of successful prosecutions and disqualifications; and  

c) how they will report on their performance and ensure they are measuring the deterrent effect of their responsive work.