Taxman failing to tackle billions of pounds of fraud, British MPs say

Britain’s tax collectors are likely to be significantly underestimating illegal avoidance and not doing enough to tackle the problem, according to lawmakers.

HM Revenue & Customs estimated that it is losing £5.5 billion ($6.8 billion) a year to tax evasion but evidence from a crackdown on VAT in 2021 suggests the real number might be far higher, the cross-party group of Members of Parliament on the Public Accounts Committee said.

The total “tax gap", which includes error, non-compliance and outright evasion, was £39.8 billion in 2022-23, the most recent data shows. The government has committed more money to HMRC to crack down on fraud and evasion and recover £6.5 billion a year by the end of the parliament in 2029-30.

Closing the tax gap is urgent because Chancellor of the Exchequer Rachel Reeves left herself little space in the public finances at the October budget, and is in danger of breaching her “non-negotiable” fiscal rules. Spending and welfare cuts, or even tax rises, might be necessary at a fiscal update in March if her £9.9 billion of headroom is erased.

Preventing tax leakage would be a relatively painless way of restoring fiscal space and HMRC should be taking more aggressive action, the PAC said in a report. The £5.5 billion estimated to be lost to fraud a year is equivalent to 0.7 per cent of all taxes owed.

“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 is not sufficiently curious with a view to accurately diagnosing the problem,” said the Conservative committee chair Geoffrey Clifton-Brown.

The committee’s report added that HMRC “does not have a clear objective or strategy to tackle tax evasion” and that a lack of collaboration between HMRC, the business registry Companies House and the Insolvency Service was making the problem worse.

Online Sales

The claim that HMRC may be understating the amount lost to tax fraud was based on an analysis of additional revenue raised following 2021 legislation that made online marketplaces liable for VAT from overseas sellers. It generated an extra £1.5 billion of revenues a year, five times HMRC’s original estimate.

“The PAC is concerned HMRC may have underestimated the level of evasion occurring and is calling on HMRC to assess the reasons behind this gap,” the committee said. The MPs also expressed concern about “the lack of curiosity shown by HMRC to investigate the issue.”

Of the £5.5 billion of illegal evasion in 2022-23, 81 per cent is estimated to be down to small businesses. A number of retailers set up online UK operations after Britain left the European Union to avoid VAT payments, according to a separate National Audit Office report last year.

One home in Cardiff, Wales was bombarded by 11,000 letters from HMRC in 2022 and 2023 asking for unpaid tax after foreign firms used it as their registration address. Companies House told MPs during the inquiry that between 5 per cent and 20 per cent of all 5.4 million registered firms may be fraudulent.