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How Tax Evasion Was Allowed to Soar Under the Conservatives

A damning new report reveals growing numbers of small businesses and retail outlets have used a series of scams to evade paying tax

Candy store
An American-style candy store on Oxford Street, London. Dozens of similar stores are currently under investigation for alleged tax evasion.

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Rachel Reeves, the chancellor, has inherited a soaring level of tax evasion among small businesses and retail and online shops, a new report by the National Audit Office reveals today.

It shows that tax evasion among these groups has risen from just 66% in 2019 to 81% in 2023.  HMRC is now losing £5.5 billion in tax revenue each year.

Failure to act sooner by HM Revenue and Customs and Excuse, the Insolvency Service and Companies House, and a decision by the Conservative and Liberal Democrat coalition in 2011 to make it quick and easy to set up UK companies online from anywhere in the world, leaving, according to the report, “the UK vulnerable to tax evasion from fraudulent businesses”.

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This led to companies registering directors named after cartoon characters or named after Charles Dickens characters like Scrooge. One director was named in 50,000 companies.

None of these companies were verified by the authorities and it has taken 13 years until April this year for the last Government to bring in verification of directors of new companies registered at Companies House.

The report lists a series of scams used by small businesses to evade paying tax. One problem is the development of increasingly sophisticated electronic sales suppression computer software which removes or reduces the value of transactions. This was estimated to cost the Exchequer £450 million in lost revenue but the figure is five years out of date and will not be updated until December this year.

Other scams including paying for equipment and staff in cash “off the books” or not registering transactions on tills.

Companies that have been found to be doing this include thousands of take away restaurants and sweet shops.

Another big scam is called Phoenixism which costs HMRC around £500 million a year. This is where a company goes bust to avoid paying debts and taxes and is immediately resurrected as a new company operating at the same address with the same people.

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Directors who do this risk being struck off but so far only seven directors out of thousands have been struck off.

There is also a scam running on online marketplaces where companies based abroad – where they must register for VAT – fraudulently present themselves as UK firms. The last Government has tried to stamp it out by making the organisers of online marketplaces check this but it is still happening.

Sometimes this involved hijacking documentation from genuine businesses or falsely representing themselves as a UK firm that operates below the £90,000 VAT threshold.

Gareth Davies, head of the NAO, said: “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 use new powers to tackle tax evasion.”

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An HMRC spokesperson said: “We generated a record £843.4 billion in tax revenues last year, paying for the vital public services everyone relies on. The UK has one of the lowest tax gaps reported in the world, but the government is committed to reducing it further.

 “While the vast majority of businesses pay the tax that’s due, we will continue to use our civil and criminal powers against the determined minority who refuse to play by the rules. Such action helped us protect £41.8 billion in the last 12 months.

“We also work closely with partners including the Insolvency Service and Companies House to tackle evasion in retail and online services.”


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