Public Accounts Committee questioning focuses on overseas companies evading VAT on online sales

The report followed up the National Audit Office’s (NAO) report on tackling tax evasion in high street and online retail, which was published in September 2024.

The four witnesses at the evidence session were:

• Sir Jim Harra - First Permanent Secretary and Chief Executive at HMRC
• Penny Ciniewicz - Director General Customer Compliance Group at HMRC
• Dean Beale - Chief Executive at The Insolvency Service
• Louise Smyth - Chief Executive and Registrar of Companies at Companies House

Before focusing on tax evasion the committee briefly asked about some other areas, including Making Tax Digital and HMRC customer service.

Making Tax Digital

The Chair of the PAC, Sir Geoffrey Clifton-Brown, raised a concern about threshold reduction for Making Tax Digital to £20,000 by the end of this Parliament and considered it “quite a compliance burden” for small businesses. He said: “Can I just ask you to exercise that change with the lightest possible touch”.

Sir Jim Harra replied that details have not yet been published. However, as it would be after initial cohorts have been brought into Making Tax Digital for income tax, “we will have learned a lot of lessons by the time that that lower turnover cohort joins the programme”.

VAT registration

Lloyd Hatton (Lab) suggested that despite a “huge increase” in the number of businesses, in particular in the hair and beauty sector, the number of businesses registering for VAT has ‘flatlined’. Harra explained that businesses are required to register for VAT only if their turnover exceeds a threshold, which the government keep under review.

Asked about the “rent-a-chair” model in the hair and beauty industry, where workers split into self-employed entities to stay below the VAT threshold, potentially facilitating tax avoidance, Harra reported that HMRC ‘actively police’ both the artificial depression of turnover and the employment vs. self-employment dividing line. He said: “I can reassure the council [Hair Council] that both non-compliance with the VAT threshold and with the dividing line between employment and self-employment are risks that we focus on and devote significant resource to”.

Online marketplaces

On the new rules for tax reporting for an online marketplace, Sarah Olney (Lib Dem) asked Harra to comment on the “suppressing effect” that eBay UK, who are based in her constituency, had told her was resulting from the fact that all new sellers now need to register and provide their tax information at the point when they make their first sale. This is in spite of the fact that many of them are householders just looking to dispose of used items, she noted. 

Harra replied that new rules do not change anyone’s tax liability: “What they do is to provide for the marketplaces to provide information to HMRC, which we will use for compliance risk assessment purposes”. He elaborated that HMRC will only receive information where there are a significant number of sales or sales over a certain amount. He acknowledged concerns about the impact of the policy, but reassured the committee that HMRC will keep it closely under review.

Clive Betts (Lab) accused HMRC of not having a strategy to tackle tax evasion. Harra answered that HMRC have an overall compliance strategy structured around “prevent, promote and respond”. He added that while the tax gap measure indicates the extent of non-compliance, “it often does not tell us what the risks are that are driving that non-compliance”.

HMRC customer service

Rachel Gilmour (Lib Dem) voiced concern about HMRC’s phone line waiting times and “the lack of a human face”, arguing that: “There are very few things that are more distressing than when one, having quite rightly filled out one’s tax returns, gets a bill that one knows to be inaccurate, and it takes ages and ages to get the right bill”.

Harra acknowledged that HMRC’s customer service levels have not been “good enough” in the last couple of years. However, he suggested that, currently, the average wait time is about 11 to 12 minutes which has significantly reduced over the summer.

Asked about HMRC’s new staff following the government’s funding, Harra explained that 5,000 additional staff joined the department on 25 November, and HMRC expect to bring in about another 300 before the end of this financial year. He added that about two-thirds of the recruits who joined in November were from outside HMRC and about one-third applied for the jobs from another part of HMRC.

Tax gap – small and large businesses

Hatton questioned why HMRC does not monitor the tax gap by sector, especially for the online retail industry. Harra said that the data currently is not good enough to break down the tax gap by sector but HMRC analyse non-compliance by tax type and behaviour, as these risks often apply across multiple sectors.

Hatton suggested that HMRC focus on SMEs because they are easier to identify, while larger corporations and wealthy individuals with resources may engage in “aggressive tax planning” and offshore tax evasion that is harder to spot. “The reason why it is hard to find out is that you guys do not have a good picture about what is going on, while they are armed to the hilt with every accountant, tax expert and lawyer that money could buy to make sure that they get away with paying as little tax as possible,” he argued.

Harra disagreed. He said that HMRC use a “resource-intensive model of man-marking” for large businesses and the wealthy due to the risks they pose to the tax system. “They are probably the area where we have greatest insight, case by case, into the attitudes and behaviours of the taxpayers,” he added.

“Tax avoidance, tax planning and tax evasion is a spectrum, and one can very quickly blur into the other”, stated Hatton who also claimed there has not been a huge amount of progress made in getting multinationals to pay their ‘fair share’. “We know that Amazon’s main UK division did not pay any corporation tax last year or the year before. I am not saying that that is all evasion, but it seems slightly concerning that we do not have an accurate picture about how it minimises its tax liabilities,” he continued, suggesting again that “HMRC only really knows about a very small part of the picture”.

Harra replied that HMRC do have a picture of non-compliance by large businesses, adding: “There is no doubt that multinationals, including tech giants, engage in international tax planning and leverage their ability to shift profits.” He agreed that was leverage that small and medium-sized businesses generally do not have.

Overseas companies VAT evasion

Citing the NAO report, Clifton-Brown highlighted three reasons why VAT collection has been sidestepped: “increasingly sophisticated false documentation”, “purchasing UK citizens’ private individual accounts to not appear as retail businesses” and “use of shell companies registered in the UK”. He asked if HMRC place ‘weight’ on any of these reasons and have researched them.

Penny Ciniewicz replied: “The issue here is particularly UK establishment, and we do work actively in the area of UK establishments. It is for online marketplaces to do the majority of that work, but, for instance, over the last year, we have written to nearly 13,000 businesses to test the understanding of UK establishment. What we found was that 11,700 of those were non-established, so we have adjusted their VAT treatment. When we checked back with the online marketplaces, they had already been treating the vast majority—11,000—of those as non-established, and they are adjusting more of those as we speak”. She added that HMRC is actively supporting the online marketplaces to police that activity and have been working to bring out new guidance to support them.

In regards to overseas companies, Harra emphasised that HMRC are collaborating with Companies House on improving registration processes, including recommendations for a joint registration service, while maintaining its own VAT registration system, which does not rely on the Companies House register.

Clifton-Brown voiced concern about the length of time it takes for HMRC and Companies House to closely integrate their systems. Harra argued that a big project such as this requires investment, adding: “In legal or policy terms, we have different definitions in our two regimes, which need to be tied together to have an integrated service, but also…there is a whole range of change under the Act that has just come in, which has to be implemented in the right sequence”.

Olney asked about steps HMRC are taking to address the marketing of evasion tactics to overseas sellers on online marketplaces. Harra believed that in most cases online marketplaces are correctly identifying non-established businesses and accounting for VAT correctly. However, he emphasised that HMRC would carry on monitoring the issue as it is a ‘borderline’ in that regime. He clarified that of 12,700 identified cases of incorrect establishment records, marketplaces properly accounted for VAT on 11,000 but not on 1,700, leading to a £150 million estimated loss from online marketplaces not fully applying VAT rules (part of an overall estimated £700 million of tax leakage in relation to online sellers).

Transaction-based reporting

On transaction-based reporting, Harra said that while the UK has not introduced it yet, it is something that they check with their international partners to see how they are using it and how effective it is. He said circumstances in the UK were different from some countries which have introduced it: “We have Making Tax Digital, which now requires all VAT-registered businesses and, from 2026, all income-tax-registered businesses, to keep digital records. That is something that you could look at in the future, to build out from that. In addition, the government have said they will consult in the spring on e-invoicing and increasing the use of that”.

Harra argued that one way of managing compliance risks around VAT would be to get lots of transaction-level data: “As a tax administrator, I might absolutely love that, but it would be quite burdensome.” He added: “When you look at the VAT gap, it has been decreasing over time, so we would have to justify any change of that nature by reference to it being good value for money and a proper burden to place on businesses.”

Anti-evasion initiatives

Rebecca Paul (Con), a member of CIOT and ICAS, asked Harra what assurance he can provide that HMRC are getting value for money with the various initiatives that it's doing to tackle tax evasion. Harra replied that overall the department has a rate of return of about £22 for every £1 it spends in the customer compliance group - describing the rate as “very positive”.

Sarah Green (Lib Dem) raised the issue of phoenixism and asked if it has increased since the pandemic and if HMRC are taking any steps to tackle it. Harra responded that in 2022-23 about 15% of all the losses to non-payment came from phoenixism, approximately £500 million - £600 million. He added: “That is a significant amount of money that we want to tackle, as well as it being a very egregious type of behaviour”.

In relation to electronic sale suppression (ESS), Paul highlighted that despite a form of ESS resulting in significant tax losses being identified back in 2016, it had taken HMRC “a long time” to address the issue and take action. She asked for a rationale behind the ‘slowness’. Ciniewicz replied that the issue is “complex and technical”, stating that: “Sales suppression is not necessarily a product of the use of this kind of software. It can also be the use of legitimate functions in a till, such as training software, to hide income and sales”. She added that HMRC have been tackling it through a range of interventions, including investigating criminally, with eight arrests being made in two cases so far.

Ciniewicz elaborated further and said that HMRC have active criminal investigations into end users of these technologies. In parallel with that, they have also been using other tools including contacting over 5,500 businesses and asking them to “make a declaration” on their usage, and following up on other risk and intelligence reports relating to the use of ESS. She concluded that: “We are investigating those cases and think we will have some cases delivering additional tax yield from that”.

Asked about a reduction in prosecutions pre-Covid and post-Covid, Harra agreed with the chair of the committee that prosecutions have been ‘depressed’, not just in relation to tax offences, but more generally following the pandemic. He said: “We are seeing an increase in the number of positive charging decisions that we are getting from the prosecuting authorities and hopefully that will follow through”. He highlighted that HMRC are increasing the size of their fraud investigation service (up to 5,400 staff by 2029-30) and expect that to result in an increase in the volume of criminal investigations and prosecutions.

Other issues debated in the session also included tackling the importation and sale of illicit tobacco products, HMRC’s work with Companies House, disqualification of directors and fraudulent companies.

You can read the full transcript here.