HM Revenue & Customs is significantly underestimating how much tax it loses to evasion each year and lacks a clear strategy to stop “bad actors” exploiting Britain’s public purse, an influential group of MPs has warned.
HMRC estimated that evasion — the illegal underpayment of tax through the deliberate omission or falsification of information — cost £5.5bn in the 2022-23 tax year, equivalent to about 0.7 per cent of all taxes owed.
But the House of Commons public accounts committee on Wednesday said the true figure was “likely being vastly underestimated” and accused HMRC of not being “sufficiently curious” about curbing losses.
The MPs did not put a figure on how much was lost to evasion each year. But the findings mark the latest criticism of HMRC over poor customer service, complex systems and falling productivity.
The cross-party committee pointed to reforms introduced by the previous Conservative government four years ago that made online platforms liable for VAT from overseas sellers.
The MPs said the measure had resulted in HMRC taking an extra £1.5bn in tax a year since 2021, five times more than the authority estimated at the time, indicating it had probably “underestimated the scale of evasion”.
“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,” said Conservative MP and committee chair Sir Geoffrey Clifton-Brown.
“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,” he added.
Some of the “loopholes” named in the PAC report included the fraudulent use of UK company registrations, contrived insolvencies and phoenixism to evade tax. Phoenixism refers to the practice of making a business insolvent to evade paying debts before the business is set up again under a new name.
Government agencies including HMRC, Companies House, the UK’s corporate register, and the Insolvency Service had “failed to work collaboratively, missing opportunities to increase the tax take”, the MPs found.
While the estimated annual cost of contrived insolvency is estimated at about £500mn, the Insolvency Service disqualified just seven directors for phoenixism between 2018-19 and 2023-24, out of a total 6,274 directors disqualified in that period.
“Both figures are far too low given estimates of the number of fraudulent company registrations,” the committee said, citing estimates that 5-20 per cent of all company registrations are fake.
The PAC criticised a 50 per cent fall in the number of criminal prosecutions by HMRC for tax evasion between 2018-19 and 2023-24, describing the 344 cases brought last year as evidence that the UK had “too little deterrent” for evasion.
It also said HMRC’s VAT registrations processes were “far too open to abuse”, with the authority seeming “unable” to stop businesses registering for the levy using incorrect addresses.
Warning that the current system made it “too easy to register companies fraudulently”, the MPs called for better collaboration between Companies House, the Insolvency Service and the tax agency and demanded that HMRC set out its plans to curb evasion.
Responding to the report, HMRC defended its “risk-based approach to tackling evasion and other forms of non-compliance”.
The agency said the UK’s tax gap — the difference between the tax it believes it is owed and what is actually paid, which was estimated at 4.8 per cent of taxes owed, or £39.8bn, in 2022-23 — was “one of the lowest . . . in the world, and we’re prioritising closing it further”.