Ritika Janiya
Britain is losing billions of pounds every year to small shops finding all sorts of devious ways not to pay a due amount of their taxes. The National Audit Office, the body responsible for reviewing how the government both spends and collects money, documented that so many small-scale retailers use loopholes in systems to get away from paying their taxes, thereby leaving behind massive debt at end.
Fast Growth, Low Taxation
So many of these small shops, such as sweet shops or takeaways, have become adept at expanding their businesses fast, paying very minimal tax in the process. Invariably, they go bust without clearing their liabilities to the taxman. Government suffers losses of money that it ought to have collected. HMRC estimated small businesses accounted for £4.47bn – 81%-of the £5.5bn lost in evasion and hidden income last year, up from £1.95bn-66%-in 2019-20.
The Rise of the Dodgy Retailers
The problem has worsened since 2011 when firms could register online with Companies House, even from abroad. This facilitated certain firms bypassing the normal checks. HMRC has targeted specific types of shops, such as sweet shops and takeaways, but they can’t do much to halt the tax cheats before new rules take effect by Companies House.
Before the recent elections, Labour party promised to crack down on “dodgy candy stores which mushroomed places like London’s famous Oxford Street but have since diminished a little in number.
Tricks of the Trade: How Do They Do It?
These small-scale retailers have resorted to employ tricks such as “electronic sales suppression” -ESS, by concealing the sales or creating dummy sets of accounts. They can put their tills into “training mode” in which mode they can ring up sales without actually recording them. Then, when a lot of back taxes are owed they just declare bankruptcy and never have to pay it. But wait, it gets even better. Some even restart the same business in a different name in a fraud called “phoenixism.” This way, they carry on trading like before, but without paying taxes, while making millions of pounds in profit in the meantime.
HMRC’s Challenge
Gareth Davies, head of the NAO, criticized HMRC for not having a robust plan to curtail this growing problem. He pointed out that HMRC has failed to attach sufficient priority to addressing these widespread evasion methods of sales suppression and phoenixism. They have also failed to deploy new powers given to them effectively.
Fighting tax evasion isn’t easy,” Davies said. “But there are real chances for HMRC to work more closely with other parts of the government to reduce it. Stricter controls and more efforts could bring in a lot of money and give better value for what the government spends.”
Why Stopping Tax Evasion Matters
What the NAO’s report brought to the fore is that reduction in evasion is not only an issue of collecting more money, but it’s a question of making sure business plays fair. “Some businesses that cheat gain an unfair competitive advantage over those who play by the rules.” Such is not good for competition.
Chancellor Rachel Reeves has also echoed that the remedy for tax evasion must be considered. Ahead of the July elections, she unveiled Labour’s plan for a £5 billion crackdown on tax dodgers. She responded this amount of money could pay for free school breakfast clubs and thousands more NHS appointments.
The Phoenix Problem
This is particularly concerning because HMRC estimated that phoenixism alone cost them around 15% of the total tax debt losses in 2022-23-over £500 million! Yet despite this huge loss, only seven directors were actually disqualified specifically for phoenixism between 2018 and 2023 out of more than 6,000 who were disqualified overall.
Calls for More Resources
Campaign groups like Tax Justice UK say that for many years, HMRC has been hindered both by out-of-date technology and a lack of funding, which has proved very damaging in the fight against tax fraud. Sara Hall, deputy director for external affairs at Tax Justice UK, said: “It’s no surprise that billions in taxes are being evaded each year. Give HMRC the tools and funds it needs, and it could be collecting significant sums to support the NHS, local councils, and other services we all rely on.
Davies also added that there are still “significant gaps” in the checks on online retailers, many overseas companies making false representations that they are UK-based to avoid paying VAT.
Progress in the Right Direction?
Progress has been made, admittedly, which is greater than expected: since 2021, HMRC has gathered approximately £1.5 billion more in VAT from online marketplaces-five times the amount they expected from new rules making online platforms liable for VAT. Secondly, tighter registration rules came into effect in March 2024 at Companies House; other measures under consideration, including checking the identity of company directors, should also help.
