SMEs are claimed to be responsible for £4.4 billion of unpaid tax as a result of tax evasion, according to a new report from the National Audit Office (NAO). Tax evasion is the practice of deliberately falsifying or omitting information to reduce a tax bill.
The research – which focused on the high street and online retail sector – explored HMRC’s claims that SMEs are under-declaring income or artificially filing for bankruptcy to avoid tax bills. These bankrupt firms are then re-establishing themselves with different names but conducting the same business – a practice known as phoenixism.
Tax Evasion Increasing in Small Businesses
Tax evasion has supposedly increased in small businesses, with HMRC reporting that the practice hit £4.4bn in 2022-23, rising to make up 81 percent of the evasion tax gap compared with 66 per cent in 2019-20. The NAO report also noted that whilst HMRC has strategies for dealing with tax non-compliance and taxpayer mistakes there is not a specific focus on confronting evasion, which needs to be tackled.
The reasons for tax evasion in the retail sector are said to be the result of:
- Electronic sales suppression – which sees software being used to reduce the recorded value of transactions creating artificially low revenues.
- Reducing taxable profits – by generating “dummy” accounts or running tills in training mode.
- Online company incorporation – from 2011 UK companies have been able to be set up from anywhere in the world, making it easier for fraudulent traders to operate.
Although there have been steps to tackle evading tax – including rules which mean online marketplaces are now liable for VAT from overseas sellers – more has to be done. With the government keen to get to grips with this practice – against a tricky economic background – this area will need to be re-considered, and new approaches put in place. As well as raising valuable revenue, increased scrutiny will also ensure a level playing field between SMEs who are trading in good faith, and those who are manipulating their accounts.
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