Welcome to the Public Accounts Committee on Monday 16 December 2024. HMRC estimates UK losses of around £5 billion due to tax evasion, which is most prevalent among small businesses. In 2019-20, 66% of estimated evasion losses came from small businesses, including companies, partnerships and sole traders. This figure has now risen to 81%, preventing a level playing field between businesses by giving evaders an unfair competitive advantage and depriving the public purse of its revenue. Today, we will question the Department on its understanding of tax evasion and examine its efforts to establish effective systems to tackle this increasingly costly issue. To help us with all of that, we have Sir Jim Harra KCB, the first permanent secretary and chief executive of HMRC. We have Penny Ciniewicz. I hope I have pronounced your name correctly. We have Dean Beale, chief executive of the Insolvency Service. Dean, this is your first appearance, so a special welcome to you. We will have Louise Smyth, chief executive and registrar of Companies House. She is, unfortunately, stuck on a train at the moment and is not expected to arrive until 4.00. We will take a break when she arrives, just to give her a little bit of a chance, as it is also her first time in front of this Committee, to settle down, see how the whole thing is set out and everything else. We are not expecting to ask any direct questions in relation to Companies House until she arrives, but, if there is a conversation, Sir Jim—and you may refer to her, of course—she will look at the transcript and respond in writing afterwards. With no further ado, I am going to ask you the first question, if I may, Sir Jim. As you remember, Ben Lake, who was and still is the Member of Parliament for Ceredigion Preseli, and who was on this Committee, raised with you on at least two occasions this issue of where a company of Chinese origin had sent vast numbers of letters to his address in Cardiff. The owner was swamped with letters. You undertook to look into this matter. You undertook that, hopefully, it would be sorted, but unfortunately I have, via Ben’s constituent, letters dated as late as 11 October 2024, so this is still going on. A letter was sent to his address from the Inland Revenue on 11 October with a tax demand for £117,000. There had previously been, on 18 October, five different letters sent to his address from HMRC with tax demands for unpaid import duties and VAT of varying amounts—£82, £646, £228, £253 and £66—so this matter is still very much continuing. Having raised this in the Committee twice last year, then earlier this year, one really would have hoped that this would have been sorted out, and I wonder if you can give Ben Lake and his constituent some good news this afternoon, Sir Jim, please.

 I apologise again to Mr Davies and Mr Lake for this. When I gave evidence before, I said that we had put overrides on our systems to prevent automated correspondence going out to the address, but I did confess that that was unlikely to be perfect and that, therefore, some more correspondence could get through. Compared with the past, there have been relatively small amounts of correspondence in the last few months, and we have investigated why that is the case. It relates to our customs declaration service overriding the override that we put in, so I apologise for that, and we are endeavouring to make sure that we do not send any more correspondence to Mr Davies’ address. It is not in relation to one company. There were, in fact, about 11,000 businesses that varied their registration address to two different addresses that had the same postcode. My understanding is that the intention was that all of them would go to one of those addresses, but about 2,500 of them went to the other, which, unfortunately, was Mr Davies’ residential address, and that is why he then got correspondence. Some of the companies have VAT debts that predate the online marketplace rules coming into force in 2021, and a very small number have customs debts, which is why our system keeps generating letters, but I apologise if that is continuing.

 There are two issues here. There are various companies using his address as their correspondence address. How do we stop that?

 There were about 11,000 businesses that submitted a variation to their VAT registration. Unfortunately, Mr Davies’ address shares a postcode with another address, which is a service office for companies and, therefore, was the correct address that they wished to vary to. Unfortunately, owing to a typing error by their agent, about 2,500 of the 11,000 companies varied their registration to Mr Davies’ address instead. As I said, we have put a block in on our VAT system to try to ensure that it does not send any more automated correspondence to Mr Davies, but we have a number of other systems that have address data from various stages. I did tell him that, unfortunately, we may not be able to stop it all, but, each time it happens, we are investigating and putting in a stop.

 Then there is the other issue of your own systems. Surely, it would be possible to just send out an alert to every part of your organisation to say, “We have this case. This address is not to be used for any more correspondence”. As I say, while I can understand that some of the old legacy companies might still be using that address, and you may not be able to stop them because they are companies, you should, surely, be able to stop your own organisation sending letters that do not concern him in any way.

 We have tried very hard to do so, but, unfortunately, there are 65,000 people in the organisation. They change from time to time. These most recent incidents involved manual processes as opposed to automated ones, so it is a matter of educating all of our officers that, in this instance, there is an override.

 I am going to try it once more, because that is not a satisfactory reply. I really think that, in your own organisation, if you are sufficiently digitally wired up, as I hope you are, you should be able to send an email around to every bit of your Department to say, “This has happened. Please under no circumstances send any correspondence to this address”. You owe that to this poor person who is getting these thousands of letters. It is not his fault. If I were a citizen, I would be hopping mad. He and his MP have been very courteous and very patient with all of this.

 They have indeed, Chair. I will take away what more we can do to remind officers not to use the address. Our officers may come across this once and forget the fact that, some months earlier, they were asked not to use that address, but I apologise that it has continued.

 The apology is accepted, but what we really want is action so that it does not happen any more. Anyway, I have said enough. That is fair enough and thank you for addressing that. I just want to raise two issues, although not really to get an answer from you. One is the change in the Budget that has reduced the threshold for Making Tax Digital down to £20,000 by the end of this Parliament, which is quite a low threshold and quite a compliance burden, I would imagine, for a lot of very small businesses, many of which do not have an accounts department, let alone an accountant. They probably do it themselves at midnight. Can I just ask you to exercise that change with the lightest possible touch?

 It has been announced in principle that that change will be brought in, but there are no details yet about when. It will be after initial cohorts have been brought into Making Tax Digital for income tax, so we will have learned a lot of lessons by the time that that lower turnover cohort joins the programme, but I take what you say.

 Thank you very much. Lloyd Hatton wants to talk about his hairdressing businesses—well, not only his, but all of our hairdressing businesses.

 When I was studying for my GCSEs and still had a full head of hair, there were approximately 25,000 hair and beauty businesses in the country. Today, that number has doubled and now stands at approximately 50,000, and yet the number of businesses in that sector that are registered for VAT has, essentially, flatlined. I was just wondering if you could start, Sir Jim, by telling us whether you are at all concerned by those figures. We have seen this huge increase in the number of overall businesses, but not really any increase at all in the number registered for VAT.

 There is a turnover threshold for registering for VAT. If businesses are small and operate below that threshold, they will not have to register. The Government keep that threshold under review. In recent years, it has variously been frozen, and I think it was increased by £5,000 last year, but is now frozen again. Therefore, over time, you would expect more and more businesses to come within the ambit of VAT, but, if the turnover is legitimately below the threshold, we do not expect the business to register.

 That is the main concern of this Committee. The Hair Council has submitted written information for this Committee to consider, raising specific concerns around the rent-a-chair model, which looks to split workers into individual, self-employed entities and so keep those businesses always below the VAT threshold that you just mentioned. The concern is that this is often a way for individuals to aggressively avoid paying tax or even evade paying tax. There are also considerable concerns, which I appreciate sit outside the remit of HMRC, that this model could be used for other forms of economic crime, such as money laundering. Again, I would be really grateful if you could offer us and the Hair Council reassurances that you are looking at this area, because it could be the case that this sector is, in fact, a new hotspot for tax avoidance, tax evasion and other forms of economic crime.

 There are two specific tax risks in play there. One is artificially depressing turnover below the VAT threshold, which is something that we actively police, and is part of our hidden economy work and our estimate of the hidden economy in the tax gap. The other is the dividing line between employment and self-employment. The rent-a-chair model is very longstanding in the hair and beauty industry. Provided it is done correctly, it will give rise to self-employment rather than employment. There are incentives within the tax system for people to be self-employed, but that, again, is a dividing line in the tax system that we very actively police.

 I have just one final question there. It would be great if you could offer reassurances to the Hair Council. I have had a barber in my constituency in Weymouth, south Dorset, raise this specific concern. The legitimate businesses that are doing the right thing and paying their VAT, and all their other taxes on the side, would be keen to know exactly what action will be taken by HMRC and when. The council deserves that information as soon as possible, so if you could give us at least an overview today that would be very helpful.

 I agree. We pursue non-compliance for two reasons: because we want the tax that is due, but also because we want to create a level playing field for compliant businesses. That is a very important driver for us of our activity. I can reassure the 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.

 Sir Jim, eBay UK is headquartered in my constituency of Richmond Park. I had a meeting with it last week about some of its concerns around the application of the new rules for tax reporting for online marketplaces. Its specific issue is 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. I wondered if you could comment on the fact that this is providing a bit of a suppressing effect. As I say, these are ordinary individuals, not traders. We will come later to the dangers of overseas sellers using online marketplaces. Specifically for UK citizens who want to use an online marketplace but are being deterred because of the way that these rules are being administered, I would be grateful if you could just give your view as to why it is necessary to get the tax information up front from people who may be making only one or two sales a year.

 The new rules have not come into effect yet. They begin to apply next month. They 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. We have made a lot of effort to reassure people who sell unwanted items on eBay and other platforms, and therefore will not have a tax liability, that they have nothing to be concerned about with these rules. Indeed, in the last couple of weeks, we have generated quite a bit of media coverage in advance of the new rules coming in, to try to reassure people that, if they are selling their own second-hand goods—clothes that their children have grown out of or whatever—they do not need to worry about tax. There are also de minimis limits built into the reporting requirements, so we will not get information about every small sale. It is only where there are a significant number of sales, or sales over a certain amount, that we will get the information. We will keep that under review and, if there is evidence that people are unnecessarily worrying about that, we will try to do more to reassure people. It will be important, when we get data from the marketplaces, that it is in a format that we can match to people’s records, because that will help us to target our work, meaning that we are more likely to enquire into non-compliant taxpayers and less likely to enquire into compliant taxpayers. We have been working with the marketplaces to make sure that they keep their data in a format that will support that.

 You are asking the marketplaces to collect data from people who are never going to be taxpayers or required to pay tax on their sales. Would it not be better to require marketplaces to collect the data only when they know that a tax liability is going to emerge?

 That is something that we can keep under review. I am not close enough to it, and Penny may have more information, but I suspect we have concluded that the point where a new seller is registering with the marketplace is the best time to collect the information from them, when neither we nor the marketplace will know what their pattern of sales is going to be in the future. That may well be more administratively convenient for marketplaces and sellers than for them to have to go along and get information from people subsequently when they have analysed the pattern of sales. I do appreciate that there has been a lot of controversy about this change and worry about its impact. It has not come into force yet, so we will need to keep very careful monitoring of how it is going.

 We have a lot to get through. We will leave it there, but, if you would undertake, Sir Jim, please, to keep this matter closely under review and see what more publicity you can give it, so that people are not artificially deterred from using digital marketplaces like eBay, that would be really helpful.

 It would indeed, Chair.

 Good afternoon. Many small businesses on the high street in my constituency of Shipley are expressing concern about illegally imported tobacco and vape products. A shop owner I met with recently told me that, by avoiding the import duties, other shops were undercutting him and his legally sold products. Illegal cigarettes and vapes were sold during four out of five trading standards test purchases in the Bradford area last year, so this is clearly a very significant local and, potentially, national issue. I would like to know what progress HMRC is making in reducing high street sales of illicit tobacco and vape products, if you are able to help with that, Sir Jim.

 We have long experience of tackling the importation and sale of illicit tobacco products such as cigarettes and hand-rolling tobacco, with smuggling being the main risk, but sometimes UK production as well. Of course, there are strong incentives in the tax system for criminals to engage in that, because of the very high tax rates involved with tobacco. In the case of vaping products, that has not really been the case so much in the tax system, because, until now, while they have been subject to VAT like every other product, there have been no special tax rules for them. From October 2026, there will be a new vaping products duty as well, which means that similar kinds of incentives for them will start, as is the case with tobacco. We have successfully reduced the tobacco gap. For example, it was 15.1% in 2019-20, and it has been reduced to 14.5% in 2022-23, but that is still significantly higher than some other parts of the tax gap, so it is a particular focus for us and Border Force, which administers risks at the border. Some of the other impacts of these products are not tax‑related, but Trading Standards, for example, is interested in them, and we work in close co-operation with Trading Standards. In particular, we try to manage the risks throughout the supply chain. We have fiscal crime liaison officers embedded in UK missions in overseas countries where the supply chain starts, right through to the retail end in the UK, where we co-operate with Trading Standards. It has taken us many years to build the process for managing this risk in relation to tobacco, and that is quite a highly regulated industry. There are particular compliance risks with vaping products as the new duty comes on board, and that is currently a relatively fragmented industry, but there is a national strategy, of which we are part, along with DEFRA and the Department of Health and Social Care, which is about regulating that market. Hopefully we will be able to use new licensing rules, for example, to leverage them to help us with tax compliance as well.

 Do you have a target for further reducing the tobacco gap from 14%?

 We do not specifically have a target for any part of the tax gap, but, because of its size and the fact that we are not talking just about collecting revenues here, but also about the health benefits—that is the reason why the duty is so high—it is a priority area for us, along with Border Force and our partners.

 Can you translate that into cash numbers?

 Can we leave it there? We may correspond with you about this further, but we are 20-odd minutes in and have not started the main session yet. Q13            Mr Betts: Good afternoon, Sir Jim. Moving on to the main part of the agenda and your estimate of the scale of tax evasion, are you confident of the figure of around £5 billion or is it a guesstimate rather than an estimate?

 It is our best estimate. The tax gap measure is our best estimate with the data available at the time when we make the estimate of the overall tax gap. We then revise it subsequently, when more data comes to light. Once we start to break down the overall tax gap into different behavioural types, the level of uncertainty clearly grows. In the case of evasion, we take the data that we have, but also apply expert judgment to adjusting it. For example, we tend to adjust it upwards from what the raw data shows, to take account of the fact that some evasion does not get identified as evasion during the investigation process. It is our best estimate. Q14            Mr Betts: Do you revise your estimates upwards when you become more aware of the evasion that has been happening, when you are successful in prosecutions or in engagement with taxpayers?

 I will give you two examples of when we revise our estimates after the event. First of all, some of our estimates, particularly the VAT gap, are top-down estimates based on economic data from the Office for National Statistics about the level of consumption in the economy. When the ONS publishes revised economic data after we have made our estimate, we will then revise our estimate accordingly. Some of it is a bottom-up build from our random enquiry programmes that we carry out. We will make an estimate at the point when it is due for publication, but, when cases subsequently settle and it requires an adjustment, we do that, and we will do it upward or downward, as it requires. Q15            Mr Betts: It is obviously a big number, whatever the precise number is, but you do not have a strategy to tackle it. Most people would be quite surprised at that.

 We have an overall compliance strategy. It is built of three legs: prevent, promote and respond. We aim, through controls in our systems, to prevent non-compliance, whether that be evasion or other types. Then we aim to educate and promote good compliance by people. Finally, we will respond to non-compliance where we can find it, and we have risk assessment to do that. In fact, most of our activity is in the respond area. In addition, while the tax gap measure tells us how much non-compliance there is, it often does not tell us what the risks are that are driving that non-compliance. In addition, we have, for operational purposes, a strategic picture of risk. We identify all the major risks that are driving the tax gap, and then we have a risk treatment programme for those and deploy our resources against them. On top of that, we have specific strategic approaches to particular types of non-compliance. We have an approach to serious fraud and to avoidance. As I have mentioned, we have a specific strategy in relation to tobacco, but we do not have a specific strategy in relation to the evasion element of it.

 Most of us would be quite surprised that, as a big issue, that is not something that you have a particular focus on, because it also means that you do not have an absolute, explicit objective for what you should be achieving in tackling tax evasion. You do not have a target. You do not have a particular view as to where you should be getting to with all of the work that you are doing.

 We are driven by a key target, a compliance yield target, which is designed to close the tax gap. We successfully reduced the tax gap from 7.4% in 2005-06 to 4.8% in 2022-23. Q17            Mr Betts: I understand that, but why not have a specific objective on tax evasion? It is a big issue. It is something that nobody wants to see, so why not just focus on that as a particular issue?

 It is one element of the tax gap, and we want to tackle all elements of it. We have a general strategy that applies to tax evasion but equally to other parts of the tax gap as well. Q18            Mr Betts: Do you not think that it might be a good idea to have a strategy?

 That is something that we need to look at, to the extent that the behaviour requires a particular response. Where other types of response do not work for that particular behaviour, yes, we would want to make sure that we have that, so it is something that we keep under review. You can slice and dice the tax gap in myriad ways, and we cannot have lots of strategies for different types of it. We have to be able to deploy our resources across the whole of the tax gap and apply approaches that work for us. Q19            Mr Betts: The Committee might like to see, perhaps next year, that you have had a look at a strategy, had a think about it and maybe reconsidered.

 There is a recommendation from the National Audit Office that we look at that, which we will be responding to.

 That is very helpful.

 From what you have just said, it follows quite logically that, effectively, HMRC is saying that it is willing to tolerate a degree of tax evasion. Would you be able to put a figure on that level of tolerance?

 That is not what I intended to say, and we certainly do not have a level of tolerance. No tax evasion or, indeed, non-compliance is acceptable to us. It is inevitable that there will always be some. We want to drive the tax gap down as low as we can. As I say, we have successfully driven it down from 7.4% in 200506 to 4.8% in the most recent year that we have measured it. We have kept it low for several years now, but we want to drive it down further. In the Budget at the end of October, the Government announced a significant investment in the Department, which will enable us to bring in an additional £6.5 billion a year by 2029-30 compared with previously. That should continue the downward pressure on the tax gap, including the evasion element of it.

 Hopefully a strategy will help. Now that your objective is to reduce the tax gap, will the strategy be the way out, or how will this affect the way that you approach tax evasion?

 The Government announced a number of measures in the Budget. There are some policy measures to strengthen the protection and controls within the tax gap. There is some investment in our systems and our data, but, most significantly, there is investment in additional staffing for HMRC in Penny’s Customer Compliance Group and our Debt Management Group. Taken together, all of that should enable us to achieve that £6.5 billion of additional tax revenues by 2029-30.

 My next question goes to Penny Ciniewicz. I have a relatively poor constituency. 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. With that background, do you put more emphasis on reducing unintended non-compliance, such as that resulting from human error?

 In terms of tax bills, my teams are more on the investigation end of the work in HMRC. The overarching strategy that Jim has described of promote, prevent and respond is really designed in the promotion end of it to help people get their tax right, and to prevent people getting it wrong by making it as easy as possible for people to get their tax right. A lot of the investment will be about trying to make our systems easier for people to interact with in order to help them. We also put quite a lot of money and time into educating and supporting taxpayers to get their tax right. It is a really important part of the strategy.

 Will that include really basic things such as having staff who will answer a phone within an hour and be able to give accessible advice? The lack of a human face at HMRC at the moment is something that people comment on. If you have three and a half hours to spare to hang on to the end of the phone, you might get some advice, but, if you do not, you have to walk away with the anxiety. It would certainly reassure me and my constituents in Tiverton and Minehead if they knew that a commitment to answer the telephone within half an hour would be part of that new regime.

 I appreciate that our customer service levels in the last couple of years have not been good enough, although we are certainly not taking three hours to answer calls. At the moment, the average wait time is about 11 to 12 minutes, and that has significantly reduced over the summer. Since the beginning of October, we have been hitting our service standard for our helplines, but I appreciate that that was not the case for the first half of this year or the preceding couple of years.

 We covered the issue on customer service fairly well in a previous hearing.

 That is correct. The Government have also given us about £12 million of extra funding in the current financial year to get started on that. Just over 200 of those 5,000 additional staff joined us on 25 November, and we expect to bring in about another 300 before the end of this financial year, so we are making a start towards building up that 5,000.

 These are new jobs. About two-thirds of the recruits who joined us on 25 November were from outside HMRC. About one-third applied for the jobs from another part of HMRC. This is Penny’s area.

 We see colleagues who wish to progress their careers perhaps moving into compliance work and coming to train to be compliance officers. That has long been the case and is quite helpful, as is having a mix of skills from outside and new people into the Department. We already had a plan to recruit in order to maintain the level of people in compliance, and we will be additionally recruiting around 1,000 people a year over the next few years to build up to that additional 5,000.

 It is.

 The best way of saying it is that the 5,000 will be entirely additive. Some of them will move around from within HMRC to train to be compliance officers, but they will be backfilled from wherever they come from. It is 5,000 additional staff in compliance.

 It is new to the Committee too.

 As an initial question, why do you not monitor the tax gap by sector, particularly in relation to the online retail sector?

 At the moment, we do not feel that our data is good enough to be able to break it down by all the different sectors. We did look at a recommendation from this Committee a few years ago to do that, but we concluded that, in order to gather data that would be sufficiently granular to give certainty across a very wide range of sectors, we would have to carry out a much larger random enquiry programme. We analyse it by tax and by behaviour, so the behavioural risk that drives the non-compliance. Our experience is that many of those behaviours can apply right across sectors. If you take evasion, which is the subject of today’s hearing, there is a focus in the NAO’s report on retail, but it can equally be in hospitality or the construction trade, so it applies across sectors, in effect.

 I will just park that for a second, but it is quite concerning that we do not have estimates by sector, particularly for the online retail space. Sitting alongside that, Sir Jim, we spoke at our last session about the offshore tax gap. I have the transcript in front of me, where you described the estimate from HMRC as “uncertain”, saying that there is “no official estimate of how much that is”. Those were your words. What I find concerning there is that, alongside the fact that we do not really have any idea of what is going on in terms of evasion, avoidance or tax planning in the online retail sector, we also do not really have a clear picture of the offshore tax gap. Does that not then make you think that the figures that you do present to us are just a tiny sliver of the portion? We are not looking at it on a sector-by-sector basis and we do not really have an accurate picture of what the offshore situation is. Therefore, it is not surprising that the figures that you give us say, “It is all SMEs”, because they are the low-hanging fruit here, and we do not have that good picture of what is going on offshore or in other sectors of the economy.

 I do not agree. There are two separate points in there. First of all, in terms of what we know about the online retail sector, we feel that we have very good intelligence on that. It is a fast-moving market, so we need to keep that up to date, but we have taken successive steps since 2016 to address the compliance risks that we see there, and will continue to do so as necessary. We have, we think, a good handle on how much non-compliance there is and what kinds of treatment plans are required for that. Taking the tax gap more generally, we have a comprehensive estimate of it. It is subject to the code of practice on statistics, and has been reviewed by the statistics regulator and found to be sound, but it is an estimate. When it comes to the offshore gap, while that is there within the tax gap, being able to isolate it has proved challenging. We have made a first step towards that, as you know, in relation to data that we get from overseas authorities under automated exchange of information, but that is part of the offshore tax gap and not the whole of it. Those are what I would call statistics in development and we need to continue working on them to get a better picture of that part of the tax gap going forward.

 Just to be clear, you stand by the estimates from HMRC that the lion’s share of tax evasion is committed by small and medium-sized businesses.

 Yes, that is the case. There are well over 5 million small businesses. That is a combination of people who are full-time self-employed and people, say, who have self-employment in addition to a main source of employment income. It is unsurprising that they represent a significant proportion of the tax gap, because they are a significant proportion of the customer population. There are also particular features of self-employment that create risk. For example, they tend not to have tax deducted at source. There tends not to be third-party referential data that we can check. There is scope in small businesses to get their tax wrong, which does not apply in the case of an employee, for example. Our estimate is that, in recent years, as a proportion of the tax gap, that has grown.

 Are you not concerned, Sir Jim, that those in a position to conduct very aggressive tax planning or, indeed, tax evasion are the most difficult to identify and that, in fact, small and medium-sized enterprises are the easiest to identify? Those who have tax experts, accountants and lawyers to help them are the ones who will be exploiting the offshore tax gap, which you have admitted is uncertain. The figure that was presented to this Committee last time was that it was only a third of a billion, which many on this Committee agreed was a shockingly small suggested figure. Going back to my earlier point, I am concerned that these figures and the data in this NAO report are leaving out a big part of the picture almost by design. We know exactly what SMEs are doing, because it is really easy to find out, and we do not know what online giants, others in the online retail space and those who exploit offshore tax planning are doing, because it is really hard to find out. 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.

 I disagree. The tax gap measure includes large businesses and the wealthy. It includes legal interpretation, which is challenging HMRC’s interpretation of the law. It includes tax avoidance. In the case of wealthy taxpayers and large businesses, we have a very resource-intensive model of man-marking them, because of the scale of the risk that 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. I can assure you that Penny’s part of the organisation does not find it easy to identify small business non-compliance. We can estimate it, but, of course, what the tax gap does not do is tell us, case by case, where that non-compliance is, which is why we have to devote so much resource to all aspects of the tax gap.

 As a final point, if I may, Sir Jim, do you feel that online retail giants such as Amazon pay their fair share of tax?

 It is not for me to say what a fair share is. It is for me to say whether they are compliant with their obligations. We expect them to do two things: first of all, to comply and pay their own tax, and, secondly, to play the correct part in the supply chain in helping us to manage the compliance risks, for example, of the people who sell on their platforms. In 2021, new rules came in, which place significant obligations on them to do so. There is no doubt that multinationals, including online giants, use international tax planning. There has been a longstanding OECD project to tackle that. That is about changing the tax rules as opposed to finding non-compliance, by and large, and some progress has been made internationally.

 Would you accept that not a huge amount of progress has been made, and that that area of aggressive tax planning can often spill over into tax evasion? That is the reality of this industry. Tax avoidance, tax planning and tax evasion is a spectrum, and one can very quickly blur into the other. 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 or where it puts its income generated in the UK so that it can pay less corporation tax and other taxes, yet we seem to have such a clear picture about what SMEs are doing. This goes back to the concern that HMRC only really knows about a very small part of the picture, which is why I asked the question of whether you think that Amazon pays its fair share of tax when it has not paid any corporation tax in the UK on its main division for the last two years.

 When it comes to non-compliance, we have a picture, and it is included in our measure of the tax gap of non-compliance by large businesses, which includes the online giants. There is no doubt that multinationals, including tech giants, engage in international tax planning and leverage their ability to shift profits.

 That is leverage that small and medium-sized businesses simply do not have.

 That is generally correct. It is a different type of compliance behaviour.

 Thank you very much, Lloyd. We were in tax policy there, which is not a matter for this Committee. Nevertheless, Mr Hatton makes a really good point. We need to be looking at taxing where the activity takes place, not where it might be taking place around the world. That is probably something to think about, Sir Jim. I gather that Louise is outside, so, in courtesy to her, I am going to call a five-minute break. Sitting suspended. On resuming—

 Louise Smyth, a particularly warm welcome to you. I am sorry that you have had such a difficult journey, but we appreciate your persistence in making it here today.

 Sir Jim, we are coming back to online marketplaces and referring to what we were talking about earlier, which is that online marketplaces are now responsible for collecting VAT information from overseas sellers. When this was introduced, HMRC collected five times more tax than it expected, which is good news, but I am interested to know how you managed to underestimate, to such a large degree, the tax losses that you were previously making. Could you comment a bit on that?

 The 2021 measures do two things. They change policy so that more tax is due than was previously the case, but they also address non-compliance by making online marketplaces responsible for accounting for VAT from overseas sellers that are not established in the UK. As you say, those measures are raising significantly more tax than we envisaged. There are a number of factors. First of all, online selling took off quite significantly, because of, for example, the pandemic, and has been rapidly growing. In addition, we had imperfect information prior to that, so it is positive that the yield is between £1.4 billion and £1.8 billion a year, starting in 2021-22 and going out to 2026-27. It is not perfect. Like all parts of the tax system, there is still leakage from that, which we will want to continue to bear down on. In addition, while the rules were introduced in 2021, they are still relatively new for online marketplaces. We continue to work with them and will be able to get more from them over time as they settle in and as the marketplaces become better at operating.

 There are three things that I heard you say that might have contributed to that underestimate. There is a change in policy; you have cracked down on non-compliance; and there is an increase in volume. Have you broken down, between those three things and, indeed, any potential other factors, which might have been most contributory to your forecast?

 I do not have any further breakdown. I can certainly look and, if I have more information, let you know.

 Thank you. Ms Ciniewicz, there has been a big underestimate of previous losses, even if we are not quite sure why. What assurances can you give us that there are not other areas where we may have underestimated losses, for example in the setting up of phoenix companies? Are we sure about how much tax loss we are currently experiencing?

 The tax gap itself is a publication that, as Jim said at the start, is assured by the Office for Statistics Regulation, but it has uncertainties in it, which are set out in the tax gap. We do not have perfect information, but we do have a lot of information in HMRC and a lot of data. The first phoenixism estimate was published in our annual report and accounts this year. It was a first estimate and we continue constantly to try to refine our data to get a better understanding of what is going on.

 Penny Ciniewicz, if I could take you to paragraph 2.15 on page 35 of the report, it has three bullet points of reasons that the NAO thinks might be why VAT collection has been sidestepped: “increasingly sophisticated false documentation”; “purchasing UK citizens’ private individual accounts to not appear as retail businesses”; “use of shell companies registered in the UK”. Is that something that you have researched? Do you place weight on any of that and, if so, what are you doing about it?

 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. We are actively supporting the online marketplaces to police that activity and, indeed, we have been working to bring out new guidance to support them, which will be available in the new year. It is an important part of the online marketplace compliance process, so we are keen to support the online marketplaces with that.

 Just over the page on paragraph 2.17, it says, “HMRC does not know how many other businesses may be falsely appearing as UK-established but not identified in its risk assessment”.

 There is an unknown unknown in everything, but we have a relatively high degree of confidence in the work that the online marketplaces are doing. It is their responsibility in this system to do the work to test that scale of establishment. That example that I have just given you demonstrates that they have a fairly good grip at the moment. We are not relaxed about it, but we are seeing some really good results, as evidenced by the amount that we predict is going to be brought in by this change.

 I am delighted that this Committee and the NAO pushed you into going for a change of law to establish this tax on marketplaces, which is now bringing in an extra £1.5 billion. Q39            Mr Charters: This is to you, Louise Smyth, in regard to fraudulent companies. The reality today is that, for a fraudster or a criminal, it is far too easy to register as a company at Companies House, is it not?

 The introduction of the Act that came into force in March has made it much harder. Previously, we did not have powers to query or challenge any information that was given to us. If it was properly delivered, which just means that people filled in the form and put information that looked right in the right boxes, we were duty-bound to accept it. With the new Act, we now have the ability and authority to query information that comes to us, to annotate the register if we are concerned about information, and to remove information if we think it is suspicious. They are really good strides in taking action against fraudulent companies, but there is more to come, and the introduction of identity verification is a huge step forward in terms of verifying that people are who they say they are, and that we know who we are dealing with. Q40            Mr Charters: I will come on to ID verification in a moment, if I may. Do you share my concern that fraudsters and criminals could have stockpiled listed companies before the Act was fully implemented? What are you doing in relation to this risk?

 They could have done. In the report, the surge in applications was attributed to that. I think that the surge was actually more about people avoiding the fee increase, but I can talk about that if anybody asks questions. Just because they have registered prior to the Act, it does not mean that we cannot take retrospective action against them. For example, when we introduce IDV, we will be applying that to all officers who are on the existing register, as well as new ones, so they will be caught up in that. Also, if we are suspicious about any element of the company, we can take retrospective action. It does not matter that they incorporated before the Act came into force. Q41            Mr Charters: Coming on to ID verification, having worked as a head of financial crime in the private sector, I know that it does make a significant impact in reducing fraud. I was concerned that some of the timelines, following on from the initial public target of March 2025, seem slow. If they were introduced sooner, we would, ultimately, see fewer fraudulent companies in Companies House defrauding the taxpayer and my constituents. Have you looked at the business case for accelerating that programme of work, given that it could have a material impact on reducing the overall level of fraud and economic crime in the system?

 Everyone would like to go more quickly, including me, but this is a large and complex digital programme. We are taking the Government’s One Login and using that for the ID verification, but it is not just a plug-and-play solution. It will require integration with all of our digital systems. Our digital systems were developed on the premise that we are dealing with a company rather than an individual, and that is where that relationship is, so it has required us to do a significant amount of work to make sure that we integrate it properly. This is also a big change for Companies House, so we need to make sure that we have recruited the right resources to support people through that process and to manage it, that we have trained them, and that we have the proper processes in place. It is also a big change for the business community who are going to have to interact with us, and so we need to make sure that we prepare them properly for that change. IDV will be available in the spring of 2025, so there is not that long to wait now. That will be on a voluntary basis. We are introducing a six-month period where people can voluntarily go through the IDV process, so that they are well prepared in advance for when we mandate it. We are hoping to push as many people through during that six-month period as we can, to minimise the impact on people if they have difficulties when it becomes mandatory. From autumn 2025, we will be mandating IDV. We will be tying it to submission of people’s confirmation statements, which is a time when they have to interact with us on an annual basis. We anticipate getting 7.5 million officers who are currently on the register through the IDV process within a year. The reason why we are staggering it over the year is that those volumes are quite big and we need to support people going through that, but we are, also, as I said, tying it in with a time when they would interact with us anyway. Q42            Mr Charters: You are tying it to the annual confirmation statement. Would it not be better to adopt a risk-based approach, looking at the machine learning and other risk-based factors that you are looking at, to identify which companies and incorporations are most likely, in regard to fraud and economic crime, and to target it based on the dataset that you have, rather than simply waiting for the confirmation statement to come up? Would it not be better to bring forward those that have a higher risk factor?

 That is an alternative way of doing it, but, given the volume of people we have to get through, we have decided to tie it to that and to do it in an orderly and straightforward manner for people. That does not mean that there are not other things that we can do with our new powers, based on our risk profiling, to take action against companies that we think are conducting fraudulent activity. Q43            Mr Charters: I will now move on to my next set of questions, which are primarily directed to Sir Jim, around overseas companies. Again, it is very easy for an overseas company to present in the UK, because the proof of address just is not there. Surely, this has to be a priority. With every month that this delay in implementation goes on, there is more of a tax gap that we are missing out on.

 Certainly, we welcome the Economic Crime and Corporate Transparency Act, and we are working closely with Companies House to support its implementation, which will help us with tax compliance. We automatically create a corporation tax record for any registered company, but we do not automatically create a VAT registration, because there are particular risks that we want to manage through the VAT registration process that company registration simply does not enable us to do. We have our own VAT registration service. We collect our own data. We adopt a risk-based approach to checks on that. All applications go through a risk assessment and fewer than 50% automatically process. Just over 50% of them trigger one of our risk rules and, therefore, we will carry out further validation or compliance checks on those. In some circumstances, that includes the address, but not routinely in all cases. As Penny mentioned, we carried out an exercise earlier this year, where we identified a large number of overseas companies that had registered for VAT on the basis that they were established in the UK, where our evidence suggested that that was not the case. Ultimately, we changed the registration for a significant number of them, and have recorded them as non-established in the UK for VAT purposes. They still need to be registered with us but, reassuringly, when we checked what the online marketplaces were doing, in the vast majority of those cases they had identified them as not established and were applying the correct VAT treatment. In addition, we spoke at the beginning of the hearing about the 11,000 overseas businesses that varied their registration to an address in Cardiff. We also checked them and, while some of them had VAT debts to HMRC predating the online marketplace rules coming in, none have after that. When we checked with the online marketplaces, we found that about 70% of those 11,000 businesses were selling on online marketplaces, and the marketplaces had accounted for VAT on about 95% of their sales. We have some confidence that the VAT register, combined with the line of defence that the online marketplaces due diligence rules give us, is working pretty well. It is definitely a borderline in the regime, which poses a compliance risk and which we have to monitor all the time. As the NAO report highlights, there are some very sophisticated and persistent attempts to game it.

 Forgive me, Sir Jim. It does seem to me as if there is joint responsibility between HMRC and Companies House for determining whether a company is operating overseas. Where does that sit and can you give some clarity about who is ultimately accountable for that?

 Some overseas businesses are required to register in the UK for VAT, so it is right that they do so, but it is important that they correctly record whether they are established in the UK—in other words, they have a presence here—or, in fact, they are trading entirely from overseas into the UK. We saw in that exercise earlier this year that a significant number of businesses were not doing that correctly and, in fact, when we engaged with them, they mostly argued with us that they were doing it correctly, which suggests that there is quite an education required. We also are working with Companies House on registration, quite apart from implementing the Act, but including the recommendation from the National Audit Office for a more joint registration service. That all has to fit in with Companies House’s quite extensive programme of work. As I say, in the meantime, we have our own registration process for VAT, which does not rely on the Companies House register.

 Finally, perhaps for Ms Ciniewicz, given that your approach is focused on preventing tax evasion before it occurs, are you doing enough to ensure that businesses really are operating in the UK? Are you investing enough in that area of compliance?

 We certainly want to invest more, particularly in our systems and our data. Identity verification and authentication, and further development of that in HMRC, is important as well. We are pleased with the new VAT registration process and systems that we have put in place. That has prevented revenue loss of nearly £500 million just at the stage of that initial risking, and then probably another £170 million from the further compliance checks. I am continually looking to do more to prevent. We are very focused on this and extremely focused on our partnership with Companies House. We are collaborating with it on a whole range of work to help implement the Act.

 Can I just follow that question? To establish the status of an overseas company is incredibly difficult, I would imagine. There are some very different regimes to ours and they might not be used to the same type of tax regimes as ours. Could you not employ—when I say “employ”, I mean that in the loosest sense of the word and not literally—people such as customs agents and the online marketplaces themselves to check the statuses of these companies?

 The online marketplace rules do in fact put the onus on the online marketplace to ascertain the place of establishment for VAT. They have a lot of data and information that will help them do that, so it is helpful that the legislation gives them that responsibility. We are also looking, at the other end of that process, at doing as much as we can to educate people. We are probably one of the first tax administrations to translate all our guidance about our VAT processes into Mandarin and that has been successfully launched in China. Other tax administrations are indeed looking at that and thinking that is a very good thing to do. We try to cover the whole range of customer behaviour. We try to make sure that people who want to get their tax right get the information and, at the other end, that we are preventing bad actors entering the system.

 I have a question for both Sir Jim and Louise Smyth. If I could take you to paragraph 17 on page 10, the key phrase there is, “HMRC and Companies House have discussed closer integration of systems to tighten registration requirements but estimate these will take five to 10 years”. In a very fast-moving world, with you both having fairly sophisticated digital systems, that seems an awful long time. I wonder what you could do to speed that up. If we cannot get two key Government Departments successfully communicating with each other electronically in a short space of time, there must be something wrong. The criminals out there will know that perfectly well, will they not?

 We are very actively engaged on that. My deputy, Angela MacDonald, has regular meetings with Louise on that programme. There are a number of reasons why it is a big project that requires investment. First of all, 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, as Louise said, there is a whole range of change under the Act that has just come in, which has to be implemented in the right sequence. We are preparing our spending review submission and getting that ready for the next three years, beyond 2025‑26. We already have some investment next year to help us reform our registration processes and we want to bid for more, precisely to overhaul the registration process and do that in conjunction with Companies House.

 I agree. It would be quite a significant prize if we were able to deliver this. From the Companies House perspective, for the next two to three years our shopping list is full in terms of delivering what the Act requires of us. Although we would like to do this, we need to deliver what the new Act has already given us before we start on something as significant as this. It will require significant resource. It would be a significant change for the business world as well. One issue is that we have different dates that people have to file with us and that would cause disruption to the timeline of businesses in terms of how they interact with Government. We would have to manage that carefully as we delivered, as well as the significant digital changes that would be required.

 Presumably, both of you were consulted on the new Act. It is slightly disappointing, if that is the case, that you are still saying there are difficulties in legal definitions between the two of you and that is one of the impediments to making this closer digital co-operation happen.

 We are looking at something here that is over and above what is in the Act. The Act contains a number of steps, primarily for Companies House to carry out, although we are working with it. What we are looking at here is a recommendation to go further than that. As Louise says, there is a significant prize from that, but it is also a major change. HMRC, certainly, is keen to make as rapid progress on it as we can and, as I say, we work jointly at the chief executive and deputy chief executive levels to try to make that happen. It will be subject to investment, but we are actively working on the case for that investment.

 We will leave that there for the moment. I am sure we will want to return to that.

 Sir Jim, there is a striking piece of evidence at figure 10 in the report about how online marketplaces are being used and actively marketed as a way of evading tax rules. I wonder if you could comment, perhaps, on what HMRC is doing about cracking down on this marketing of evasion tactics to overseas sellers.

 Figure 10 shows quite a sophisticated and persistent attempt to create a false documentation trail in order to enable an overseas business to masquerade as established in the UK when, in fact, it is not. That is very much a minority activity. In the vast majority of cases, as we have demonstrated from the two exercises we have conducted, online marketplaces are correctly identifying non-established businesses and accounting for VAT correctly. However, it is something that we will carry on monitoring, because we know it is a borderline in that regime. People will try to cross to the other side of it in order to escape the online marketplaces’ deduction of VAT from them. This is the most sophisticated end of it, being marketed to people. It is something that we are alive to, but both of the significant exercises that we have done so far suggest that the rules, while they are not watertight, are working really well, hence the level of yield that we are seeing from them.

 You are currently estimating that about half of the £300 million that you identify as deliberate evasion from selling goods and services online comes from the online marketplaces. What makes you so sure about that?

 That is not quite right. The estimate is that there is about £700 million worth of leakage here, £300 million of which is deliberate evasion and £150 million of which is the online marketplaces not applying the rules fully. Penny mentioned those cases where we identified that these companies were wrongly recorded as established. There were about 12,700 of them. When we went to the online marketplaces, we found that they were correctly accounting for VAT on about 11,000 of them, but not in relation to about 1,700. That is, for example, where that £150 million figure comes from. We need to keep working with the online marketplaces to shrink that, as well as to stay on top of new risks as they emerge.

 Ms Ciniewicz, how are you working with the online marketplaces to make sure that they are applying the correct VAT treatment?

 We work closely with those marketplaces and, as you can see, we also conduct our own compliance activity on a risk basis in order to supplement their insight and their understanding. We share understanding of risks, insight and evidence, where we have it, that customers are not correctly registered with them. We are also working with them to develop new guidance, which will be available from the new year and will help them to understand some of the kinds of tests that they could be applying. It is not a simple playbook, because you have to take into account the situation of the individual firm, but it will help to give them more to go on.

 Do you think the online marketplaces have access to enough HMRC data to be able to do most effectively the job they need to do?

 I have no sense that more data is required for them to do that job. As Jim has indicated, we are seeing quite a strong performance in terms of their ability to identify those companies, but we are always keen to support them.

 Ms Smyth, how much has fraudulent company registration reduced since the introduction of the Economic Crime and Corporate Transparency Act?

 It is difficult to say. We estimated prior to the Act coming in that there was 5% fraud on the register. External commentators put that at more like 20%. I suspect the figure is somewhere in between those two. It is difficult to say how much it has reduced. I do know what action we have taken. We have removed 50,000 registered office addresses from the register. We default them to our address and then we send them on to the strike-off route. We are referring companies for strike-off at a rate of 3,000 a week at the moment. We have also removed numerous other bits of information that we have identified as fraudulent. This affects 63,700 companies, so there is plenty there. At this stage, it is difficult to say how much we are reducing it. It is always going to be difficult, because you do not know what is there that you have not spotted yet. One problem is that the serious organised criminals are probably going to be compliant on the register, because they would want to look as if they are doing all that they should, so they are going to be quite difficult to spot. We need to make sure that we increase our intelligence capability, so that we know those risk indicators to look for. We are working on that.

 I imagine that if you are finding it hard to estimate how much fraudulent registration has been avoided or detected, then it is going to be quite difficult to say how much tax evasion has also been prevented as a result. Is that right?

 We know how much we have stopped, but we do not know how much was there in the first place or whether it is increasing in certain areas. We can estimate how much was stopped, but how that translates into tax I am not sure.

 Our estimate of the tax gap does not tie back to, for example, registration in Companies House. As I said, the register that we really manage closely is the VAT register, because it is our first line of defence from fraudsters. For that, we do not rely on Companies House registrations; we have our own registration process. In 2022, we introduced a new VAT registration online system and overhauled the risk assessment controls in that, in order to reduce the risks to us. We keep that under review. As I have said, we would like to embark on a more wholesale overhaul of our registration processes with investment.

 Currently, is it true to say that although we know that fraudulent company registration is a risk for tax evasion, it is impossible to estimate?

 As Penny mentioned, we know that, since the new VAT registration service went live in August 2022, we have blocked just under £500 million worth of tax loss through that, plus a further £170 million in 2023-24 from the additional checks that we carry out on registration. It is a first line of defence. Registration in itself is not the loss of tax, but it is people getting on to the register who should not be there or getting on with the wrong classification that then creates a tax risk. We would prefer to prevent that upstream at the registration stage where possible.

 We are talking about joint working. Most of the public looking at this would say, “They are all part of Government, are they not? Why are we going to have to legislate to get them to work together? Should they not be doing that anyway?”

 We were doing it anyway.

 We certainly have worked together closely for many years. However, as Louise said, until the Act came into force, Companies House had very restricted powers to police the company register, which is one of the reasons why we have our own processes over and above that. The Act really creates an opportunity for us to enhance our working together, but also efficiency in terms of doing things only once if possible. It came into force in March and is a very large project for Companies House. We are supporting Companies House wherever we can, because it is important to us that it be implemented. For example, Louise mentioned the cleansing of the existing register. We have been sharing data in areas where we think the register may be wrong to help Companies House do that.

 When will you have completed all the tasks that you are required to do by the Act?

 The implementation will take place over the next two years. We have significant things to deliver. IDV is the big one for next year, but there are other things that will come along. For example, mandating digital accounts will be a big thing for us to deliver, but that will give us significant benefits in terms of our ability to tag the data that is provided to us. That will enable people and machines to interrogate that data and will be of use to HMRC, as well as to us.

 That will all be done within two years.

 Two to three years, yes.

 Two to three years from when?

 We are dependent on our resources and our programme of work, but also on secondary legislation and when that comes through. There is a significant programme of secondary legislation attached to the Act. Some things, such as mandating digital accounts, will be, again, a significant gain for us, but we need to make sure that we do it right and properly prepare the business community for it.

 Can we have a target date as to when you are aiming to have all the measures in place that are required by the Act?

 Our programme is planned out for three years.

 Three years from when?

 From March.

 Last March.

 No, March this year.

 Right, so it is effectively four years from the Act coming in.

 Yes.

 Will address verification be part of that process? Most laypeople looking on would think, “If someone is going to register a business, two things ought to be pretty clearly required. One is to prove who they are and the second is to prove where their business is located”.

 Address verification is not part of the Act. There is always a balance. To create the environment for economic growth, the focus in the past has very much been on the speed of registering a company and the ease of setting up a company. The Act sought to redress that balance by putting a focus on economic crime, which is a growing problem. The decision was made that identity verification was the big prize here, and address verification, which would be an additional burden for business, was not included in the Act. If, once we have done the identity verification, it is considered that address verification would be required as well, then that will need to be legislated for.

 It is still going to be possible for Mr or Mrs Bloggs to register their address at 10 High Street without you checking whether 10 High Street really exists.

 Yes, because I have no legal powers to do that, but we do work in the background around preventing addresses getting on the register in the first place when we can see that they are being used fraudulently. We have had some good gains in that space and also in getting them off quickly when they have been used fraudulently.

 Are you not allowed to ask for the information?

 That is not covered in the Act.

 Right, so is that something you are pressing to be changed?

 It is something that we do discuss with the Department, yes.

 What does that actually mean? It is something that you discuss with the Department.

 It is for the Department and Ministers to decide on what is included in legislation. As you say, the more checks that are done—say we checked addresses as well as ID—the more certainty we have around the information that we have. Currently, we do not have legislation to do the addresses.

 The ability to check addresses would enable you to better tackle evasion and fraud.

 Yes.

 Coming on to Sir Jim, there are certain things that you are not doing that other countries have done. Transaction-based reporting is one. Why is that, if it would help you tackle evasion?

 That is something that we keep under review. We have Making Tax Digital, which now requires all VAT-registered businesses and, from 2026, all income-tax-registered sole traders and landlords with income above £50,000 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. That is also a method of standardising the data, but different countries start from different positions. One way of managing compliance risks around VAT would be to get lots and lots of transaction-level data. As a tax administrator, I might absolutely love that, but it would be quite burdensome. 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. It is something we constantly look at. We constantly check with our international partners how they are using it and how effective it is, but it is not something the UK, at this point, has introduced.

 You have not introduced it. You are not planning to introduce it, but have you done an assessment about whether there would be benefits from introducing it?

 We have certainly looked with international partners at what benefits they get and what benefits we might be able to get, but we have to bear in mind, as we do that, the different circumstances in the UK. For example, our VAT gap is significantly different from that of some other countries that have introduced that. I cannot predict what would happen in the future, but you can see how it could in future be built on the foundations that we have created, if it was decided to do so.

 I am trying to get to an answer about whether you think there might actually be a benefit, weighing up the costs on the other side, in actually bringing transaction-based reporting in, bearing in mind the different circumstances in the UK. Have you done an assessment yet as to whether there would be net benefits from doing this?

 We certainly have not published any formal assessment. Penny’s area gathers lots and lots of data. We have discussed the data we are going to get from online marketplaces from next month. Generally speaking, the more data we can get, the better we can manage tax compliance. How big a difference it would make, given that our VAT gap is already relatively low and reducing, is not clear.

 No, it is not clear, because you have not done an assessment, have you? Would it be helpful if you did the assessment? Then you might be a bit clearer about whether there would be benefits.

 We have taken other steps such as, for example, Making Tax Digital for VAT, which has made significant inroads into error in the VAT system. We regarded that as a greater priority to do.

 I am not saying that other things are not important. I am merely suggesting that, at some point, it might be worthwhile doing an assessment. Is that something you would intend to do in the future?

 I cannot say that we will, but it is a method of managing compliance risks that we are well aware of and we keep under review.

 Can I come back to you, Louise Smyth? This Committee is under no illusions about the scale of how you have to transform Companies House. It is one of the biggest changes in your history. We are under no illusions on that. You gave an answer to Mr Betts that you thought it could be done in two to three years. If you can achieve it in that timescale, that is admirable. I will give you one example of the scale of the difficulties you are under. I will preface the question by saying I have nothing against the Chinese in general, but we have received evidence from a Graham Barrow, a fraud specialist who works on behalf of banks and other financial institutions, who has said that, since the start of the year, about 30,000 companies that appear to have Chinese directors had registered at Companies House. If that is true, just that one item, checking the veracity of those companies, is a massive task, is it not?

 Yes. We cannot assume that just because they have Chinese directors, they are fraudulent.

 No, I did preface that.

 We have recognised and published in our strategic intelligence assessment that overseas companies are a particular risk for us. We are developing a control strategy underneath that, which will provide the tactical plans for how we deal with that. We have increased our capacity in the intelligence space. These are small numbers compared with HMRC, but we have increased our capacity from less than 10 a couple of years ago to 130 now. We are making really good progress in setting up the infrastructure for us to be able to do this strategic intelligence work and to address the key issues that are threats to the register. Since March, we have shared 420 intelligence assessments with law enforcement and with other Government Departments, such as HMRC and the Insolvency Service. We are pulling on the resources and the expertise out there to enable other people to use those intelligence sources in order to investigate from their perspective or to take action against criminality.

 Are the pair of you, Companies House and HMRC, able to fully share intelligence at the moment? Is there any impediment to you doing that?

 We are.

 While HMRC generally has to keep its data confidential, we have about 250 legal gateways for sharing data for a whole variety of purposes, including with Companies House. We have, for example, recently shared data with Companies House to help it with the cleansing of the register.

 That is really helpful. Thank you, both of you.

 To build on my earlier point, it seems like you are rolling out ID verification based on operational convenience to Companies House rather than economic crime risk to the United Kingdom as a whole. I do not know if you want to answer that, but it is just my takeaway, really, from your response.

 My response would be the same. There are other ways that we can tackle that. Our strategic intelligence assessment has identified those risk areas and we are doing work proactively to tackle those. IDV is a massive operational challenge, but also a challenge for the companies that are going to have to comply with it. We need to make it as simple as possible for them. Within a year, they will all be subject to IDV. You have to remember that there has not been anything before. Within a year, we will be in a totally different position in relation to IDV.

 I would just like to disclose, before I start, that I am a member of the Institute of Chartered Accountants of Scotland and the Chartered Institute of Taxation. Sir Jim Harra, why do you not know how much tax evasion HMRC is stopping?

 We do record how much additional revenue we collect. Last year, it was about £41.8 billion. Within that, we have information about the type of non-compliance, the tax base, the type of customer, but also the culpability of the behaviour. For example, over the last five years, we have charged penalties in about 90,000 cases where we consider that it was evasion, deliberate non-compliance. We do gather that information.

 You do have a number broken down for tax evasion, then. We have a number for tax evasion that HMRC has stopped with its various initiatives.

 We certainly have data about the deliberate non-compliance that we have addressed either through criminal investigations and prosecutions or through civil penalties. That is our definition of evasion, in effect: deliberate non-compliance.

 Would it be possible for us to have some more information after this on those numbers? That is not coming through in the report that we have.

 We can certainly look at what we can give you.

 Thank you. Following up from that, what assurance can you give us that you are getting value for money with the various initiatives that you are doing, in order to tackle tax evasion?

 Overall, we have a rate of return of about £22 for every £1 we spend in the customer compliance group. I am not sure if I am quoting exactly but, recently, the NAO has given a report that says that it is without doubt value for money. Within that, we are covering different types of behaviour. That is an average over the whole of the compliance group, but it is a very positive rate of return. If you look at the investment that the Government announced on 30 October, that also gives a very healthy rate of return over five years.

 I am going to return us to the issue of phoenixism, if I may. My first question is to you, Sir Jim. How concerned are you that phoenixism has increased since the pandemic? What are you doing to address it?

 We have long recognised it as a risk within the system across a number of different taxes. We have, for the first time, come up with our estimate of it. In 2022-23, we believe that about 15% of all the losses to non-payment came from phoenixism. It was somewhere between £500 million and £600 million. That is not within our statistics, because it is an operational estimate, but we will continue to refine that, as well as updating it for later years. That is a significant amount of money that we want to tackle, as well as it being a very egregious type of behaviour.

 You mentioned 2022-23, but you have not reported on the overall performance and impact of your work on phoenixism in 2023-24 yet. Why is that?

 That is the net loss after all of our activities. That is what we have not managed to stop, but we do have a very extensive insolvency practice within HMRC and we have a number of actions that we take against phoenixism, including through some recent legislative powers that we have been given. One issue for us in relation to phoenixism, in contrast with a commercial creditor, is that we have to deal with everyone who has a tax liability. We cannot choose not to deal with someone because they pose a risk of debt to us or a risk of abuse of insolvency. We have taken some powers. For example, we now have powers to insist on financial security from people who we believe pose a risk of phoenixism to us and, in 2023-24, we estimate that that protected about £125 million that we would otherwise have lost. Basically, you have to give us that financial security and then, in the event that you go insolvent, we can use that against any debts in the insolvency. If you fail to adhere to a security requirement, that is a criminal offence and, last year, we had 110 prosecutions for that and 78 convictions. That is one example. In addition, since 2020, we have had a power to issue notices to directors to make them personally liable for the debts of their company in the event that they are abusing the Insolvency Service. Again, last year, we issued 53 of those notices for £15 million. Although it came into effect in 2020, it does not apply retrospectively. It applies only to liabilities arising after that. We expect that to ramp up quite considerably in the current year and future years. In addition, we will make referrals to the Insolvency Service if we see grounds for why someone needs to be disqualified, for example, as a director, for abusing the insolvency rules. That is the range of activity that we are undertaking to tackle.

 I am going to direct my next question to you, if I may, Dean Beale. Thank you again for coming this afternoon. Why is it so difficult to qualify company directors for phoenixism?

 It is not difficult to disqualify directors where there is evidence of unfitness. Phoenixism can very much be an aggravating factor in determining the seriousness of misconduct that may have gone on in a company. There is no statutory offence of phoenixism, but we disqualified last year 1,222 directors, which was about 30% up on the previous year. We expect to do around the same again this year. The majority of those disqualifications were for quite serious misconduct around bounce back loans and other Covid support measures but, within that population of disqualified directors, there will have been many cases where there have been taxes unpaid. That may have been repeat behaviour as well, which is really where we are coming from, from a phoenix point of view. It is about somebody trading and not paying their taxes. The business goes insolvent. They set up again doing something broadly similar. They trade again and do not pay their taxes. Certainly, pre-Covid, the majority of our director disqualification actions were cases where the lead allegation was that there had been some particular intent to trade to the detriment of the Crown. That includes abuse of the tax system, not paying taxes using the money that you recover from customers through VAT, or deducting PAYE from employees and not handing that over to HMRC, but using it for other purposes. Since Covid, we have a more serious matter of misconduct that has become more apparent in the cases that we review. Of course, we will lead on the more serious allegation. While the NAO report picked up a very small number of pure phoenix cases that we have done over the years, that does not really give a good indication of the amount of work we do where there is misconduct in relation to tax affairs or generally where we are disqualifying directors for more serious allegations. That is borne out by the periods of disqualification that we see now. Pre-pandemic, when the majority of our disqualifications were in relation to tax affairs, we saw an average disqualification period of around five and a half years. Now it is closer to 10 years, because BBL abuse is generally seen as being more serious and quasi-criminal by courts. That attracts a higher tariff. We are taking these directors out of the marketplace, and every director we take out of the marketplace is another prevention of future phoenixism, because they are banned. To breach that is a criminal offence and breaching a disqualification order would bring in more opportunities for personal liability.

 Do you have a sense of how much of your caseload involves phoenixism?

 Unfortunately, with our somewhat aged systems, which we are hoping to replace in the next couple of years—that has been a common theme through this—we are not able to readily extract that without going through and reviewing every single case that we do. I would say that it is probably around 10%, or maybe lower. We see that repeated behaviour as an aggravating factor. Certainly, with something like very clear misconduct around bounce back loans, we will investigate as much as we can, within reason. Where we have a good case based on a bounce back loan, we will not expend more time and resource if it is not going to get us a better outcome than us just leading with the more serious allegation like that. On the back of the NAO report, we have started an action group across our three organisations to specifically look at phoenixism. We are really keen to bring it to the fore and to be more overt about those cases where there is this repeat pattern of behaviour. We want to do more going forward to demonstrate that, but not at the expense of us pursuing more serious offences.

 On this subject, paragraph 3.21 on page 48 shows the number of directors disqualified, and it would concur with what you were just saying. In the last five years, between 2018 and 2023-24, you have successfully managed to disqualify 6,274 directors, but only seven of those were directly for phoenixism. The NAO says at the end of that paragraph, “The Insolvency Service told us it is reviewing how it measures its performance in tackling phoenixism”. It does sound as though your service could do a bit more in this respect.

 As I say, it is more around communicating the nature of the cases that we are taking action on, rather than needing to take different action specifically to tackle phoenixism. A director taken out of the marketplace for 10 years because they have abused bounce back loans may have also not paid their taxes in the current company that we are looking at and, indeed, in the previous company if they have a history of that. It terms of achieving our objective, which is to take a bad actor out of the marketplace, it will not benefit us. If I can be self-critical, we are missing some important information there about the fact that phoenixism is not good. We expect people to run their businesses responsibly, lawfully and pay their taxes, and there is more that we have agreed to do to try to get that message more overtly out there.

 If you get one or two high-profile cases and publicise them well, the deterrent effect could be quite significant.

 Yes. We have some plans around that already and it is something that we are committing to do more on.

 If I may push a little bit further on that point that the Chair just made, that track record is not great. Only seven of those were specifically for phoenixism. As we have discussed, though, this is at least £500 million of lost tax, which is a significant figure. We also know that, perhaps even more pressingly, this is a vehicle for other forms of economic crime, primarily money laundering. No one in this room would doubt that this is a significant and multifaceted issue. With that in mind, can you give us any measure of how your performance on tackling rogue company directors is going to improve? Do you honestly think that that figure of only seven is acceptable?

 We need to understand what that seven is. Those are seven cases where there was nothing more serious to pursue other than phoenixism. In fact, I had a look at one of those cases in anticipation of this Committee session. It had nothing at all to do with HMRC. It was a reuse of a business model that had already been seen to be unsuccessful, because the business had gone through insolvency. In the grand scheme of seriousness, that in itself is not a particularly serious case for us to pursue. If you are asking me what those six or seven cases tell us about our efforts to deal with repeat abuse of the tax regime, not paying taxes, collecting tax in and using that for purposes than paying HMRC, I would say that that does not really tell us anything about our performance. However, a large proportion of the 6,000‑plus disqualifications we have taken will have unpaid taxes in them, whether it is in a single company or multiple companies. In some cases, we absolutely still do lead on a trading to the detriment of the Crown allegation. We did 140 of those cases last year. That is our lead allegation. For us, if it is in two successive companies, that is an aggravating factor. That may mean that the person receives a six-year disqualification rather than a four-year disqualification but, in terms of the actual substance of the misconduct, the misconduct is that you in some way failed in your duties to collect in and pay over taxes, as you are expected to do, in a way that demonstrates a particular intent. You may have paid all of your other creditors, but you have not being paying your tax liabilities. Therefore, we would lead on that trading to the detriment of the Crown allegation. It does not appear in our publications or in our enforcement data as a phoenix case. Some of them will have been multiple failures, repeat behaviour. Some of them will be single‑company cases—

 If I might interrupt, the Chair gave a very good example of the numbers we are talking about when it comes to these rogue directors and phoney companies. We are talking about thousands and thousands. That is why the number of seven is particularly shocking. To be honest, the 6,274 is not a huge amount better, when we know that this is an industrial industry. The numbers are huge when it comes to the number of phoney companies and rogue directors behind them. These stories have been in the newspapers for a very long time about fictitious companies, made-up people, Mickey Mouse being in charge and all the rest of it. We all know it all too well. Going back to my initial point, can you please give us some concrete guarantees about how you are going to measure your performance going after these rogue directors, particularly on the grounds of phoenixism? These numbers are not acceptable and are not particularly good when it comes to performance. What would good numbers actually look like, as far as you are concerned?

 We want to increase the number of enforcement outcomes that we achieve across all of the types of outcome. That might be a prosecution. We prosecute for a range of insolvency and company law offences. We also do a significant amount of work gathering, analysing and sharing intelligence. Some of that goes into the wider community of law enforcement and organisations that tackle economic crime. We do that through our membership of the National Economic Crime Centre. For some of the companies that you are talking about, these fictitious shell companies that are set up for nothing other than nefarious purposes, we have shared a significant amount of intelligence that has helped other law enforcement agencies to take action. In terms of our activities here, we have a whole range of new offences under the Economic Crime and Corporate Transparency Act. We will be pursuing those in collaboration with Companies House. Across our three organisations, following the NAO report, we have set up an action group that is currently working on a plan in response to the NAO report, which will include doing more disqualification work and more publicity around phoenix cases, which maybe has been lacking in the past. We have a directors information hub, which we use to try to help directors to avoid—

 If I might press, I will go back to my original question. What would good look like and what would those numbers look like? I do not think the numbers in this report—the figure of seven specific phoenix cases or that other figure of 6,274—are good numbers. I certainly hope you do not think they are. What would good look like and when are we going to get there? It is a really short question, so a really clear answer would be fantastic.

 It is very difficult for me to say. As I say, we disqualified 1,222 directors last year. That was about 30% more than the previous year. We want to continue to increase our numbers of successful disqualifications and our total range of enforcement outcomes. Prosecutions were around 2,300 in total last year. We want to do more. We want to be productive. We want to utilise technology to do more. I cannot put a particular figure on it, because that will be determined by the level of activity that is going on in the economy and the sort of cases that are suitable to come to us. Many will be suitable for other enforcement agencies to pursue, whether that is HMRC, the NCA or the police. We will be contributing increasingly to that work to tackle economic crime across the piece going forward, both through the new offences under the ECCTA and by implementing new technology over the next couple of years, which will enable us to be more productive with the resources that we have.

 Sir Jim, as this is an area of cross-organisational working, do you have a clearer idea of what HMRC would think good looks like in this area and whether there would be any figures or timeframe for when you might deliver good?

 We clearly want to get the losses from abuse of insolvency or company dissolutions down. We have, in 2024, invested in a new insolvency case management system to help us with that, and better risking capability. I have 627 people in my insolvency practice working to ensure that insolvency is used correctly in relation to tax and is not abused. The Chancellor did announce at the Budget that she wants to see greater co-operation between our three organisations and we are working on an implementation plan to deliver that, which we will share with the National Audit Office as part of our response to its report.

 Thank you, Sir Jim. That is really helpful.

 We are going to move on to electronic sale suppression now. In 2016, I believe you identified a form of ESS that was resulting in significant tax losses, and then you looked again in 2019 and found that the loss was much more than you thought. It was £450 million per year. A strategy then came out of that in 2019. In 2022, new powers were granted. It seems to have taken quite a long time to address this issue and take action. What is it behind that slowness? Can you explain that to us, Ms Ciniewicz?

 It is a complex and technical area, particularly if there is electronic sales suppression software in use. 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. We are working to understand the technologies that lie behind that and to investigate into the use of those technologies, at the same time as sharing intelligence internationally with our international partners, such as the J5, which we work closely with. We have been tackling it through a range of interventions, including investigating criminally. We have made eight arrests in two cases in relation to the providers and suppliers of electronic sales suppression. In one of those cases, two individuals involved with the supply of ESS have been charged and the trial will begin next October. In the second case, no further action in relation to those criminal charges is being taken due to some of the factors in the case, but we are now looking at the use of the civil powers that you mentioned. We also have cases under consideration for criminal investigation into providers of electronic point of sale materials. We also have active criminal investigations into end users of those technologies. There is quite a lot of work going on, not necessarily visibly, at the moment. In parallel with that, we have also been using some of our other tools in what we call our one-to-many work. We have contacted over 5,500 businesses and asked them to make a declaration on their usage or not. We are working through those responses. We have active investigations going on and we are also following up on other risk and intelligence reports relating to the use of ESS. We are investigating those cases and think we will have some cases delivering additional tax yield from that.

 It is reassuring to hear about the arrests. When do you anticipate starting to use those civil powers more routinely?

 We take these types of activities seriously. Our first port of call to date has been, as I say, the exploration of criminal prosecution. In those cases where that does not prove to be the best route forward, we will in the near future be looking at the use of those civil powers.

 You planned to update the estimate of the tax loss from ESS this month. Do you now have those new estimates? When can we expect to see those?

 That is due in spring 2025.

 It is now spring 2025; thank you. Moving on, HMRC has reduced its use of prosecutions. The number of prosecutions resulting from HMRC’s criminal investigations has reduced from 749 in 2018-19 to 344 in 2023-24. I am interested, Ms Ciniewicz, in your perspective on the impact on deterrent effect of that reduction in prosecutions.

 In a previous hearing of the Committee, you heard about some of the work we are doing to understand the deterrent effects in an evidence-based way. Clearly, we have reduced the number of criminal prosecutions in that period. Our first-line measure, which we call positive charging decisions—the number of cases that we take to the Crown Prosecution Service or other prosecuting authorities—is increasing again. We had over 500 positive charging decisions last year, and that is the beginning of the pipeline for a prosecution, which may come further down the road. We are increasing the number of positive charging decisions. I do not expect them to necessarily hit the level that you described at the start. We look to make the most effective use of those powers. In the more than 10,000 civil cases that my fraud investigation service takes forward, as well as the criminal investigations, we are seeing a much higher average value return in terms of the tax at risk that we are investigating. The focus of those powers, particularly the criminal powers, on the most egregious forms of non-compliance is, in itself, a deterrent effect. Certainly, you have seen some very high-profile cases in the last year and that sends a message about our seriousness in taking on some of the most sophisticated offenders, using those criminal powers.

 I can see that one of the strategies you have been using is to identify groups of businesses and send a letter out to them if you think their revenue is looking too low. How effective has that been, in your view, in terms of recouping tax losses?

 We use a whole range of techniques to improve compliance, including digital nudges and prompts in our online services. We use data and intelligence to identify potential non-compliance, where we think people’s returns might not be in line with what we expect them to be, and give them the opportunity to correct. We also do a full range of one-to-one interventions. Last year, overall, we opened over 310,000 individual investigations across my Department. There is a whole spectrum of interactions with HMRC that help the people who want to comply to get their tax right, but also treat very seriously those people who are seeking to deliberately evade their tax. We will take that process very seriously, particularly for those 10,000 or so cases that are investigated by the Fraud Investigation Service.

 Sir Jim, on this subject and as my final question, that table on page 49, figure 15, is quite stark on the subject of a reduction in prosecutions pre-Covid and post-Covid. You will be aware that this Committee has been concerned about this drop in prosecutions and the deterrent effect that it might have. Indeed, in your Treasury minute, you agreed with us that this might be the case. If you agree with us, what are you going to do to ensure that this number of prosecutions is increased in future?

 First of all, you are right. Prosecutions have been depressed, not just in relation to tax offences, but more generally following the pandemic. 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. While we have, since 2019, had a strategy of focusing our criminal investigations on the more serious fraud, which is reflected in the fact that, for example, the proportion of convictions that get a custodial sentence has increased from about 35% in the four years up to 2020 to nearly 50% in the four years since then, we do want to increase the overall volume that we carry out. We are increasing the size of our fraud investigation service. It was about 4,400 people in 2018-19. It is about 4,800 now. It will go up to 5,400 by 2029-30 with the additional resources that we have been given. I would expect that to result in an increase in the volume of criminal investigations and prosecutions we see, but also the serious end of the civil interventions we make.

 A theme, for me, if I can be so candid, in the answers is a lack of join-up when it comes to these challenges. At the end of the day, be it VAT, incorporation or insolvency, it is often the same fraudsters and criminals. Can you give us some assurance about what the future vision for collaboration looks like, be that in terms of sharing data or of prosecutions? Can you give this Committee a bit more confidence about the level of join-up between your organisations?

 From my point of view, we very much welcome the steps that Companies House is taking under the Economic Crime and Corporate Transparency Act. We are supporting it to implement that Act. We are also working closely with it on our investment bids for the spending review to try to get as much value as we can as a tax authority from the joint registration work that we can do. We have been helping Louise’s organisation to cleanse the register and develop its capabilities to implement the Act. In the case of the abuse of insolvency and dissolution to evade tax, we have our own strategy within HMRC for what we do about that, but we are committed to improving—

 You have your own strategy, but I am wanting confidence about a joined-up strategy here.

 As the Chancellor announced in her Budget, we are committed to improving collaboration between our three organisations on that. Over the remainder of this financial year, we will be developing a concrete plan to do that.

 I would support that. The introduction of the Act, which enabled us to have greater data sharing powers, means that we can capitalise much more on how we work together to tackle some of this. We have been working closely together. There is always more that you can do. We have joint interests and joint aims that we can exploit.

 I would just add that, at an operational level, we work very closely every single day across a range of fronts in our casework. We wound up a company in the public interest last month, where there had been false accounts filed. There had been a failure to pay over tax. We had the initial complaint from trading standards around the supply from China of substandard products. Getting this information and working together across the piece, we have taken that business out of the marketplace. It is now in our public interest unit for an investigation. Going forward, for me, working on this joint strategy will be a real positive move. Sharing more data from across the organisations, particularly to help early intervention activities, whether by us or by HMRC, gives us the best opportunity to nip egregious behaviours in the bud or at least maximise the opportunities to recover value, to recover taxes that are due, before it gets to the insolvency state.

 On that really important note, I note your very aspirational answers, all three of you. We will be following that with great interest to make sure it is translated into real action. This has been a really illuminating session. We have covered a lot of ground. Sir Jim, Penny Ciniewicz and witnesses from the Insolvency Service and Companies House, thank you all very much. You have spent a lot of time today and we have appreciated it. There will be an uncorrected version of the transcript available in the next few days.   Page 38 of 38