The cost of tax-dodging is likely to be far higher than the annual £5.5 billion estimated by HMRC, an influential group of MPs has warned.
The UK’s tax authority has processes which are “far too open to abuse” and is “not sufficiently curious” about the true scale of the problem, the Commons Public Accounts Committee (PAC) said.
The cross-party group of MPs has called on HMRC to establish a clear strategy for tackling evasion and deliberate non-compliance in a scathing report published on Wednesday.
HMRC estimated that tax-dodging cost Britain £5.5 billion in 2022-2023, but has acknowledged that this calculation was uncertain, with the committee chairman warning that the “many billions rightfully meant for the public purse could just be the tip of the iceberg.”
In its report, the PAC said that loopholes in the current system are making it easy for fraudulent behaviour to go undetected.
VAT registrations processes, for example, are “far too open to abuse,” and the authority is not exploring options to tighten controls sufficiently, it warned.
HMRC does not routinely check addresses when businesses register for the levy, but says it has confidence that its “risk-based” assessments, combined with due diligence rules for online marketplaces are “working well,” it said.
“We are concerned that HMRC is not sufficiently curious about the true scale of tax evasion,” the report said.
While the authority recognises that transaction–based reporting would give it access to more data, it has also not carried out any analysis to assess whether this would be good value for money, according to the committee.
Significant gaps remain in controls designed to prevent evasion, the report said. For example, overseas traders can still falsely register as UK sellers and companies due to the lax checks in both HMRC and Companies House registration processes, the MPs warned.
“This means bad actors beyond the reach of UK authorities can too easily evade paying the VAT they owe and gain an unfair advantage over genuine traders,” the report concluded.
The group of MPs, chaired by Sir Geoffrey Clifton-Brown, said that HMRC, Companies House and the Insolvency Service have failed to work together, missing opportunities to increase tax-take.
The organisations say they will be developing a joint plan for closer collaboration over the next financial year, with plans for a joint HMRC-Companies House registration service estimated to take between five to 10 years to implement.
But the committee said this timeframe was too long while major gaps linger in the checks for both companies and VAT registrations.
HMRC and the Insolvency Service are also not tackling tax-dodgers or rogue directors sufficiently, according to the PAC report.
One particular issue is retailers that allow themselves to go insolvent then set up again under a new registration, so the same directors can carry on trading.
HMRC has previously estimated the practice, known as phoenixism, accounted for 15% of its tax debt losses in 2022-23, equivalent to more than £500 million.
However, the Insolvency Service disqualified only seven directors specifically for phoenixism between 2018-19 and 2023-24, out of a total of 6,274 disqualified directors.
The number of prosecutions resulting from the tax authority’s criminal investigations also fell from 749 in 2018–19 to 344 in 2023–2024.
According to PAC’s inquiry, anywhere between 5% and 20% of UK registered companies were fraudulent in 2023.
The committee urged both HMRC and the Insolvency Service to write to the it within six months with a plan to bear down on tax evaders and rogue directors who flout insolvency rules.
Chairman Sir Geoffrey 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 (been) 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.”
Sir Geoffrey welcomed the work already being done to implement a more joined-up approach across public bodies, but said “large roadblocks” remain that will “inevitably slow down progress, and in many 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.”
The Liberal Democrats called on the Labour Government to “invest in HMRC properly” to bring an end to the “disgraceful situation.”
“The Labour government has chosen to target small businesses and care providers instead of closing these gaping enforcement gaps,” the party’s Treasury spokeswoman and deputy leader Daisy Cooper said.
“For years the Conservative Party all but legalised tax dodging with their failure to invest in HMRC, and now our public services are paying the price.
“People should not be paying through the nose to pick up the tab for tax dodgers any longer.”
An HMRC spokesman said: “The UK has one of the lowest reported tax gaps in the world, and we’re prioritising closing it further.
“Our risk-based approach to tackling evasion and other forms of non-compliance collected and protected £41.8 billion in the last 12 months – money that goes toward public investments and services that deliver the Prime Minister’s plan for change.”