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HM Revenue & Customs (HMRC) has struggled to prevent over £4.4 billion in tax evasion due to gaps in its strategy for addressing various tax evasion schemes, according to a report by the National Audit Office (NAO) released Monday.

Strategic Weaknesses in Tackling Tax Evasion

The NAO report criticized HMRC for its inability to adapt its compliance efforts to the evolving landscape of tax evasion. HMRC's current strategy focuses on specific types of taxes and taxpayer groups but does not adequately address tax evasion schemes that span multiple taxes or involve affiliated taxpayers.

"Tackling tax evasion is not a straightforward task," said Gareth Davies, head of the NAO. "But real opportunities exist for HMRC to work more systematically across government to reduce it."

The report also highlighted the growing challenge posed by the rise of online businesses, along with flaws in registration requirements, which have made the U.K. more susceptible to £4B tax evasion.

HMRC £4B Tax Evasion : New Registration Rules

In March 2024, the U.K. government imposed stricter requirements on Companies House to prevent the misuse of the business registration system. This move came after a surge in company registrations before the new rules took effect. A Companies House spokesperson confirmed that it is proactively using its enhanced powers to share intelligence with law enforcement and crack down on fraudulent activity.

The NAO found that 42% of newly incorporated companies in 2023 were retailers, compared to 23% from other sectors. The report warned that the retail industry is especially vulnerable to tax fraud.

Phoenix Companies and Tax Evasion

The report also flagged the issue of phoenix companies, where businesses go insolvent to avoid tax debts and then resurface as new entities. Phoenixism accounted for £500 million in lost tax revenue in 2022-23, but the NAO suggested the scale of the problem could be significantly larger.

Although the Insolvency Service disqualified seven directors for phoenixism between 2018 and 2024, this represents just a small fraction of the 6,274 directors disqualified in that period. An Insolvency Service spokesperson emphasized the agency’s efforts to tackle phoenixism using both civil and criminal powers.

HMRC’s Response and Future Plans

While HMRC has been granted new powers, such as the ability to name and shame promoters of noncompliant schemes, the NAO criticized the tax authority for not fully using these tools, especially in the retail sector. HMRC acknowledged the report's findings and stated that it will carefully evaluate its strategy to better target tax evasion.

HMRC spokesperson Nick McCarthy defended the agency’s efforts, noting that most businesses comply with tax laws. He added, "We will continue to use our civil and criminal powers against the determined minority who refuse to play by the rules."

McCarthy also highlighted that HMRC’s actions helped protect £41.8 billion in tax revenue over the last year. However, the tax gap — the difference between expected and collected revenue — was estimated at £39.8 billion for 2022-23, which represents 4.8% of total tax liabilities.

HMRC £4B Tax Evasion : Calls for More Focused Action

Critics, including campaign groups such as Tax Justice and TaxWatch, argue that HMRC's efforts are too scattered. Claire Aston, director of TaxWatch, called for HMRC to focus its resources on more pernicious businesses and fully utilize its powers to combat tax evasion effectively.

Despite these challenges, HMRC has made some progress, collecting an additional £1.5 billion in value-added tax (VAT) annually by holding online platforms accountable for VAT on overseas sales. However, the NAO report noted that significant gaps remain in monitoring these platforms.