BDO commentary on small business tax avoidance highlighted in NAO report

A new report from the National Audit Office has revealed weaknesses in the fight against tax avoidance by small businesses, particularly among high street and online retailers.

According to HMRC’s own tax gap report, £5.5bn was lost to tax avoidance in 2022/23. The NAO report highlighted that 81% of this amount – or £4.5bn – was the result of small business avoidance.

Commenting on the report’s findings, Dawn Register, Head of Tax Dispute Resolution at Accounting and Business Advisory firm BDO said:

“The vast majority of the UK’s 5.5 million small businesses are playing by the rules and paying tax, but there is a growing problem of tax avoidance among some small businesses, which is costing the Treasury much-needed funds.

“One of the most shocking findings from the NAO report is that HMRC has no specific strategy to tackle tax avoidance. Given that it costs the taxpayer around £5.5 billion a year, this should be an immediate priority. Law-abiding businesses expect action against those who break the rules so they can compete on a level playing field.

“Recent evidence suggests that HMRC is focusing its efforts on tackling generalised non-compliance among individuals and larger businesses. While this may make sense from the perspective of bringing more lost tax into the system, it leaves a significant enforcement gap that some small businesses are exploiting.

“While individual cases of small business tax avoidance do not necessarily result in a large tax loss to the Treasury, the cumulative losses amount to an eye-watering £4.5 billion. HMRC needs to demonstrate that it takes this seriously to have a strong deterrent effect on the small business community. This will require increased resources for HMRC, but for every £1 invested in compliance activities, HMRC can recover an additional £18 in tax revenue.

“However, first HMRC should set out its strategy to tackle tax avoidance specifically and improve its ability to understand how successful it is in tackling it, and learn lessons to improve future compliance activities. That strategy should also include the hidden economy – where some taxpayers deliberately fail to file returns and pay tax in full.

“An example of this tax avoidance is the increased use of Electronic Sales Suppression software by some retailers. These are designed to manipulate till receipts by deleting sales and routing card payments through offshore banks. Although HMRC has increased its compliance caseload in this area, particularly through the use of its nudge letter campaigns, the NAO suggests that the taxman is not giving this issue sufficient priority.

“The NAO also points out that HMRC is not making full use of its powers to tackle ‘phoenixism’ – where a company declares itself insolvent to avoid tax liabilities before it essentially becomes the same company. The taxman has in some cases started requiring security against tax liabilities for successor companies, but this could be used more often.

“The NAO report illustrates that HMRC is simply not using all the new powers at its disposal. HMRC has a wide range of both civil and criminal powers to tackle tax evasion. It should be using these powers to their full potential and then evaluating their effectiveness before seeking further powers. The fact that we are seeing continued levels of tax evasion in the economy means that either there are insufficient resources – or those resources are not being used effectively – or both.”

END

Note to editors

Accountancy and business advisory firm BDO LLP provides integrated advice and solutions to help businesses navigate a changing world. The organisations we work with are the UK’s economic engine; enterprising, fast-growing businesses that drive the economy forward. We understand the ambitions and entrepreneurial spirit of those we work with, and have the global reach, integrity and expertise to help people and businesses succeed.

BDO LLP

BDO LLP operates from 17 offices across the UK and employs 8,000 people offering tax, audit and assurance and a range of advisory services. BDO LLP is the UK member firm of the BDO international network.

BDO’s global network

BDO’s global network provides business advisory services in 166 countries and territories, with over 115,000 people working from 1,776 offices worldwide. It has a turnover of US$14 billion.

Contacts

Frank Herder
[email protected]
07812 463601