According to HMRC estimates, tax evasion cost the UK economy £5.5bn in 2022-23. However, the Public Accounts Committee (PAC) warns that this figure could be significantly higher.

To illustrate, legislation introduced in 2021 making online marketplaces liable for VAT from overseas sellers, went on to generate £1.5bn annually—five times more than HMRC had predicted. This discrepancy suggests a worrying underestimation of the scale of tax fraud.

The Cost of Tax Evasion: A Growing Concern

The PAC report criticises HMRC for its "lack of curiosity" in investigating tax evasion and fraudulent business activities. MPs are particularly concerned about the failure to collaborate effectively with Companies House and the Insolvency Service, which has allowed bogus companies to continue operating unchecked.

Key areas of concern include:

• Limited Collaboration: HMRC, Companies House, and the Insolvency Service have failed to work together effectively, missing key opportunities to increase tax revenue.

• Weak Oversight of Company Registrations: Companies House still lacks the ability to verify new and existing business addresses, making it easy for fraudulent businesses to evade scrutiny.

• VAT Fraud: The PAC has recommended that HMRC strengthen its VAT registration controls to prevent innocent citizens from being targeted for unpaid tax owed by unrelated businesses.

Low Prosecution Rates: Criminal investigations into tax evasion have dropped significantly, with prosecutions falling from 749 in 2018-19 to just 344 in 2023-24.

Where is HMRC Falling Short?

MPs are calling for a clear strategy to tackle tax evasion, including enhanced powers for public bodies and improved cooperation between HMRC, Companies House, and the Insolvency Service. The committee has set a deadline for these agencies to submit a joint action plan by mid-July 2025, outlining specific steps to combat fraudulent registrations, corporate abuse, and contrived insolvencies.

However, there is scepticism about the effectiveness of upcoming reforms. While tighter registration rules for Companies House are on the horizon, their implementation could take up to 10 years—far too long, according to the PAC. Without immediate action, fraudulent companies will continue to exploit loopholes, costing taxpayers billions.

The Need for Urgent Reform

With increasing scrutiny on tax evasion, now is the time for businesses and individuals to ensure their tax affairs are in order. HMRC may be under pressure to ramp up its investigations, meaning more audits and compliance checks could be on the horizon.

If you’re unsure about your tax obligations, seeking professional advice is crucial. The cost of non-compliance can be severe, with penalties, fines, and even legal action. Given the nature of PAC’s critical report, it’s clear that changes are coming—don’t get caught out.

For businesses and individuals, the message is clear—get your tax liability right before HMRC comes knocking.

What This Means for You

Capital Gains Tax Expertise: The Tax Faculty LLP Managing Partner Charles Tateson Named UK Capital Gains Tax Advisor of the Year 2023

The Finance Monthly Taxation Awards recognises the achievements of tax professionals from around the globe.

Winning such an award is no small feat. It is a reflection of hard work, extensive knowledge, and an ability to navigate the intricacies of the UK tax system.

Read more about Charles and the award here.

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