Tackling tax evasion in the UK retail sector: a call for robust action

The recent report by the Public Accounts Committee on tax evasion within the UK retail sector has once again highlighted a persistent issue that undermines the integrity of the UK tax system. As the retail sector continues to evolve, with both traditional brick-and-mortar stores and online platforms playing significant roles, the challenge of ensuring tax compliance has become increasingly complex. The committee’s findings serve as a crucial reminder of the need for robust measures to combat tax evasion and ensure a fair playing field for all businesses. Unfortunately, the report also highlights the difficulties faced, not only by HMRC, but also other public bodies whose outdated systems and processes appear unable to cope with the challenges faced in bridging the ‘tax gap’. 

The scale of the problem

Tax evasion in the retail sector is not a new phenomenon, but its scale and sophistication have grown with the advent of digital commerce. The committee’s report underscores the significant revenue losses incurred by the Exchequer due to evasive practices. The report quotes HMRC as estimating that tax evasion cost the UK £5.5 billion in lost revenue in 2022-23 and that 81% of that cost was attributable to small or online businesses (particularly online overseas markets). 

Challenges in addressing tax evasion

The report makes for gloomy reading. Much focus is placed on the need for HMRC, Companies House and the Insolvency Service to work together to reduce the risk of tax evasion. However, it is estimated that it would take up to 10 years to develop an interactive online/registration system to counter evasion and provide a more robust system for checking identities, addresses and sharing information. 

Focus is also placed on the low numbers of prosecutions for tax evasion (within the remit of HMRC) and disqualification of directors (within the remit of Companies House and the Insolvency Service). The report emphasises the need for greater cooperation between public departments. 

The report also seeks to address the issue of ‘phoenixism’ (i.e., the practice of company directors winding up a company only to set up a new limited company to continue the same business as before, debt free). Although it should not be forgotten that such practices also have a hugely detrimental effect on other creditors (not just HMRC). 

The introduction of the Economic Crime and Corporate Transparency Act (ECCTA) 2023 grants new powers to Companies House to remove inaccurate data and to share data with other public bodies (notably, HMRC). Although mandatory identity verification for company directors is due to take effect from Autumn 2025, the complete suite of reforms will not be operational until March 2027. In any event, the checking of identities for company directors is unlikely to place any additional burden on solicitors as KYC and AML checks will cover this ground. But that does not stop rogue traders from acting alone. 

The position in practice

Although the report appears to highlight many faults in the current system and (what it describes as) an insufficiently curious approach about the scale of tax evasion on the part of HMRC, the current approach to perceived evasion ‘on the ground’ is certainly changing. 

Perhaps as a result of the anticipated criticism from the committee, HMRC is ramping up its approach to perceived ‘evasion’. Even areas that only 5 years ago would have been considered to represent acceptable avoidance are now being treated as deliberate evasion. In practice, what we are seeing is HMRC taking a much more robust approach and using insolvency proceedings and other armoury to tackle some of the issues highlighted in the report, for example: applications for freezing injunctions to preserve the assets of perceived tax avoiders/evaders; winding up petitions whilst tax assessments remain in dispute; the publication of the names of perceived tax avoiders; increased assessment of civil evasion penalties (particularly in the context of VAT), which by definition includes an allegation of dishonesty and thus can result in personal liability notices being issued to and enforced against directors; and the pursuit of individual directors within the tax legislation or as part of insolvency proceedings. 

Points to takeaway

The report suggests that HMRC, Companies House and the Insolvency Service have a lot of work to do and are not effectively tackling perceived avoidance or evasion. But do not be fooled. The increased use of freezing injunctions and winding up petitions is presenting many challenges for small businesses and the need for a multi-faceted approach to advice and dispute resolution by legal and other professional advisers. 

Conclusion

The report on tax evasion in the UK retail sector is a timely reminder of the ongoing challenges in ensuring tax compliance. As the sector continues to evolve, so too must those public bodies charged with tackling evasion and bridging the tax gap. Ultimately, combating tax evasion is not just about protecting public finances; it is about ensuring fairness and integrity in the economic system overall. As such, it is important that the relevant public bodies remain mindful of those businesses that are endeavouring to survive in increasingly challenging times and in the face of increasing competition from overseas suppliers.