£5.5 Billion Lost to Tax Evasion in the UK, National Audit Office Report Reveals
According to a recent report published by the National Audit Office (NAO), an estimated £5.5 billion was lost to tax evasion in the UK during the fiscal year 2022/23. This significant figure underscores ongoing vulnerabilities within the country’s tax system and highlights the challenges faced by HM Revenue and Customs (HMRC) in combating tax evasion.
Systemic Weaknesses in Tax Compliance
The NAO’s report points to “significant weaknesses” in government systems that have left the UK particularly susceptible to tax evasion. Alarmingly, it was noted that small businesses accounted for 81% of the total tax evasion identified. While HMRC has indicated that the overall level of tax evasion has stabilized in recent years, it has paradoxically increased among small enterprises, raising concerns about their compliance practices.
Although HMRC has not quantified tax evasion by sector, it has identified specific industries, such as takeaway restaurants and sweet shops, as high-risk for tax evasion activities. The focus on these sectors suggests a need for targeted enforcement efforts to ensure compliance.
Lack of a Strategic Response
The report reveals that HMRC currently lacks a dedicated strategy to effectively combat tax evasion. Instead, its efforts are primarily aimed at preventing overall levels of non-compliance from rising. This reactive approach raises questions about the effectiveness of current measures to address the specific risks associated with tax evasion.
Furthermore, the NAO emphasizes that there has been insufficient attention to certain prevalent forms of tax evasion. Notably, methods such as electronic sales suppression (ESS) and the misuse of the insolvency process—commonly referred to as phoenixism, where companies are liquidated to evade tax debts—have not been adequately addressed.
Insights from the NAO
Gareth Davies, Head of the NAO, commented on the findings, stating:
“Although tax evasion has been growing among small businesses, HMRC has so far lacked an effective strategic response. Its assessment of risks has given too little emphasis to widely used methods of evasion such as sales suppression and phoenixism. It has also failed to utilize new powers designed to tackle tax evasion.”
The Path Forward
The report highlights the urgent need for HMRC to develop a comprehensive strategy that addresses the unique challenges posed by tax evasion, particularly among small businesses. A more proactive approach, focusing on high-risk sectors and employing innovative enforcement mechanisms, could significantly enhance tax compliance and reduce the substantial losses resulting from evasion.
As the government continues to seek ways to strengthen its tax system and improve public finances, addressing the vulnerabilities identified in this report will be essential to fostering a more equitable and effective tax environment.
For further information, visit National Audit Office.