The Public Accounts Committee's report on tax evasion in the retail sector

A recent report, published on 12 February 2025, by the House of Commons Public Accounts Committee (PAC), has cast a critical light on His Majesty’s Revenue & Customs (HMRC), highlighting significant shortcomings in addressing tax evasion within the UK’s retail sector. The report underscores concerns regarding HMRC’s underestimation of tax evasion in online marketplaces, the lack of a targeted strategy, and insufficient inter-agency collaboration with Companies House (responsible for company registrations) and the Insolvency Service (responsible for enforcement relating to director disqualifications). 

Underestimation of tax evasion

HMRC estimates that tax evasion (where there is a dishonest and deliberate attempt not to pay tax that is lawfully due), which is illegal, resulted in a £5.5 billion loss in revenue for the 2022/23 year, accounting for approximately 0.7% of all taxes owed. Notably, small businesses are increasingly implicated, with their share of the evasion tax gap rising from 66% in 2019/20 to 81% in 2022/23. The PAC expressed serious concern that HMRC might be significantly underestimating the true scale of tax evasion and the corresponding loss of revenue to the Exchequer. A case in point is the 2021 legislation making online marketplaces liable for VAT from overseas sellers, which generates £1.5 billion annually, five times HMRC’s initial estimate, which suggests a substantial underestimation of evasion in this area. The level of this under estimation is surprising and an explanation from HMRC would be welcome, as suggested by the PAC.

The absence of a targeted strategy

Despite the significant revenue losses, the PAC found that HMRC lacks a specific strategy to combat tax evasion. Instead, HMRC focuses on reducing the overall tax gap without setting explicit objectives or targets for curbing evasion. This approach has been criticised for not adequately addressing the deliberate underpayment of taxes, thereby potentially allowing evasion to persist unchecked, or even encouraging it. A specific and defined strategy with measurable objectives would clearly assist HMRC with its stated goal of targeting tax evasion in the retail sector and in evaluating the effectiveness of any actions taken by it. HMRC may wish to give the PAC’s comments careful consideration. 

The decline in criminal prosecutions

The report also highlights a worrying decline in the amount of criminal prosecutions for tax evasion by HMRC, which has decreased by more than 50% from 749 cases in 2018/19, to only 344 in 2023/24. This reduction raises serious concerns about the diminishing deterrent effect of HMRC’s enforcement actions. While HMRC has increased its fraud investigation staff and initiated numerous civil and criminal investigations, the significant drop in prosecutions suggests that resources have been diverted elsewhere within HMRC or a policy decision has been taken to bring less prosecutions. Current efforts may be insufficient to deter potential evaders, who may well be emboldened by this decrease in HMRC prosecutions for tax evasion. HMRC should, therefore, review this area as a matter of priority and consider whether, and how, it can take greater enforcement action to target evasion in specific areas where it is particularly prevalent and, thereby, increase the deterrent effect amongst potential tax evaders. 

The challenges related to ‘phoenixism’

The practice of phoenixism (where companies are dissolved in order to avoid paying their tax liabilities and then the business is re-established under a new company identity), poses a significant challenge for HMRC. Contrived insolvencies cost the Exchequer at least £500 million in 2022/23, according to HMRC figures. However, during the period 2018/19 to 2023/24, only seven directors were disqualified specifically for phoenixism by the Insolvency Service, suggesting a significant failing in regard to enforcement. The PAC emphasised in its report the need for HMRC to work more closely with Companies House and the Insolvency Service to address this issue more effectively. 

Recommendations for improvement

The PAC report makes a number of important recommendations to HMRC, Companies House and the Insolvency Service, and it has requested a response from those agencies within six months in order to speed up progress and address tax evasion more effectively. 

The PAC calls for HMRC to develop a clear strategy to tackle tax evasion, including setting specific objectives and measurable targets. It also recommends enhanced collaboration between HMRC, Companies House and the Insolvency Service, to close loopholes that facilitate evasion. The current timeframes given for such collaboration are too long and the PAC recommends a more ambitious timeframe in relation to a joint registration service between HMRC, Companies House and the Insolvency Service, which has been estimated by the agencies to be five to ten years away. 

Additionally, the report suggests that HMRC should reassess its estimates of tax lost through evasion, particularly in light of discrepancies highlighted by recent legislation. Notably, legislation introduced in January 2021, made online marketplaces liable for VAT from overseas sellers, which has resulted in £1.5 billion of additional VAT annually. The report emphasises the PAC’s concerns regarding HMRC’s underestimation of tax evasion in online market places and suggests that it would be helpful to understand how much of the tax which is now collected from online marketplaces is due to HMRC initially underestimating the scale of evasion, or due to other factors, such as increased online sales.

The PAC’s report emphasises the need for a more proactive and targeted approach by HMRC to combat tax evasion in the retail sector. It is to be hoped that its comments and recommendations will be given proper consideration by HMRC and appropriate action taken.