Tax evasion in the UK’s retail sector is a bigger issue than most realise, and according to the National Audit Office (NAO), HMRC isn’t fully equipped to handle it. Their recent report highlights key areas where tax revenues are leaking due to evasion — amounting to an estimated £5.5 billion in 2022/23 alone. But perhaps most surprising is this: HMRC doesn’t have a specific strategy for tackling tax evasion in retail.
Here we take a look at what’s happening in the sector, why it matters, and how HMRC can step up to address this growing problem.
The Retail Tax Evasion Landscape: What Are We Facing?
The NAO examined how well HMRC, alongside other government bodies, is tackling tax evasion in both high street and online retail. They found that while HMRC has made some inroads, certain risk areas have been consistently overlooked.
Among these, the report pinpoints three major types of tax evasion that need closer attention:
- Phoenixism: A term used to describe companies that declare insolvency to dodge taxes, and then continue the same business under a new company name.
- VAT Evasion by Overseas Retailers: Sellers operating via online marketplaces who don’t pay VAT or taxes as required.
- Sales Suppression: The use of electronic sales suppression (ESS) software to underreport transactions or reduce their value to cut down on tax liabilities.
The Growing Impact of Tax Evasion on Small Businesses
It’s not just the big players evading taxes. The NAO report reveals that around 81% of lost tax revenue due to evasion in 2022/23 came from small businesses. This is a concerning rise from 66% in 2019/20. And yet, there’s still a lack of clarity on how HMRC plans to specifically target this group within the retail sector.
Interestingly, HMRC hasn’t broken down the level of tax evasion by sector. However, it has recognised certain types of retailers, like takeaways and sweet shops, as higher-risk businesses. This highlights the need for more tailored approaches to addressing evasion in the wider retail space.
While it’s true that small businesses are facing increased scrutiny, the lack of a sector-specific approach means HMRC might be missing out on valuable insights. More granular data would allow for more precise targeting of tax evasion hotspots.
HMRC’s Current Approach: A Missed Opportunity?
The NAO doesn’t mince words in its conclusions — HMRC doesn’t have a clear strategy to combat tax evasion. In fact, some of the most common forms of evasion, like phoenixism and ESS software, haven’t received the attention they deserve. As the report outlines, HMRC’s approach is often siloed, focused only on its own operations. It needs to leverage the capabilities of other governmental bodies like Companies House and the Insolvency Service.
The report points out that phoenixism alone accounted for £500 million in tax losses in 2022/23, yet the Insolvency Service disqualified just seven directors for this between 2018 and 2023. That’s out of over 6,200 disqualified directors in total.
It’s a real issue that HMRC needs to address more urgently. It’s not just about lost revenue; it’s about fairness. When certain retailers exploit insolvency laws, they gain an unfair competitive advantage over businesses playing by the rules. It’s damaging to the whole industry.
This lack of joined-up thinking presents a significant risk for the retail sector, as tighter company registration rules and better integration between HMRC’s systems and other governmental bodies are still a long way off. Until then, these loopholes are wide open for exploitation.
Overseas Retailers and VAT: A Case of Missed VAT?
In 2021, HMRC introduced a policy making online marketplaces responsible for VAT on sales by overseas retailers. While this was expected to clamp down on VAT evasion, gaps remain. According to the NAO, overseas retailers can still evade VAT by falsely presenting themselves as UK-based sellers.
This is a big issue for online retail platforms, where the volume of transactions can easily mask non-compliance. Despite HMRC’s extensive use of data to track down these gaps, the NAO report reveals that enforcement often stops short of penalising deliberate evasion. Without stronger deterrents, some retailers may feel emboldened to keep bending the rules.
Add to this the old chestnut of post-Brexit rules being overly complicated. Meaning cross-border loopholes and systems aren’t joined up and are being exploited by those seeking to evade tax.
HMRC has made some progress in identifying non-compliance. But if evaders don’t face consequences, it sends the wrong message to others. HMRC has the powers, it’s time to use them to their full extent.
The Role of ESS Software: An Overlooked Risk
Sales suppression through ESS software is another area the NAO has flagged as under-prioritised by HMRC. ESS software allows retailers to manipulate their transaction records, and under-declaring income to reduce their tax liabilities. This practice is relatively easy to implement and hard to detect, making it an appealing option for those looking to evade taxes.
With technology evolving at such a rapid pace, HMRC must keep up. Without focusing on innovations like ESS software, there’s a real risk that these practices will continue unchecked.
Where Do We Go From Here? HMRC’s Next Steps
The NAO has made several recommendations aimed at improving HMRC’s approach to tax evasion in retail, including:
- A clear, strategic approach: HMRC needs a specific, measurable strategy to tackle tax evasion in retail. It can no longer be lumped in with other sectors, given the unique risks posed by the retail world, particularly in the digital age.
- Collaboration across government: A cross-government effort, utilising the Insolvency Service, Companies House, and other bodies, is essential. Only a joined-up approach can close the loopholes that currently allow phoenixism and other evasive practices to thrive.
- Stronger use of enforcement powers: HMRC needs to step up its use of the investigatory and enforcement powers it already has. Without action, evaders will continue to believe that they can operate without consequence.
The Bottom Line: Time for a Retail-Specific Approach
The NAO report has laid it out clearly — tax evasion in retail is a problem that’s been growing under HMRC’s radar. But it’s not too late. By adopting a more strategic, sector-focused approach and working more closely with other parts of government, HMRC could unlock significant tax revenues.
From phoenixism to VAT evasion and sales suppression, these practices are not only costing the Treasury but distorting competition within the retail sector. Legitimate businesses are being left to shoulder the burden, while evaders get away with unfair advantages.
As HMRC looks to tighten controls and ramp up compliance work, it’s essential that they also recognise the need for a more nuanced and retail-specific strategy. This could be a game changer—not just for tax revenues but for restoring fairness to the retail landscape.
At Cooper Parry, our retail team is here to help businesses navigate these challenges and ensure they stay on the right side of compliance. Get in touch to find out how we can support you and your business.
