HMRC tackles tax gap with more dawn raids

HMRC has increased its number of dawn raids by 9% to clamp down on tax evasion and tighten the tax gap, according to analysis by UHY Hacker Young

The accounting firm says the number of ‘dawn raids’ undertaken by HMRC has increased by 9% from 421 to 458 in the past year, with some likely linked to businesses that fraudulently took advantage of the government’s assistance schemes during the Covid-19 pandemic.

HMRC's increase in raids is largely an attempt to tighten the tax gap, which currently stands at £32bn - around 5.1% of the estimated £635bn in tax liabilities in 2020/21.

In late 2020, the National Fraud Office (NAO) warned that taxpayers could stand to lose £26bn as a result of fraud in these schemes.

HMRC is also suspicious of any business which has a gap between their reported profits or turnover as ‘zappers’ – as a means of tax evasion.

The software, which is loaded onto card readers, diverts a percentage of sales away from the business’s books to avoid reporting it for tax purposes. It has become widely used by small retailers and restaurants.

This crackdown on ‘sales suppression’ tools follows a raid in 2022 in which HMRC is believed to have obtained a list of customers of a major supplier of the software, allowing it to target its raids.

According to the latest HMRC figures, around 56% of the tax gap is related to underpayment or non-payment of tax by small businesses, accounting for £20.2bn of the total £36bn.

Non-compliance by small businesses has become an increasing problem for HMRC over the last five years, up from 40% of the total in 2017-18.

Over the same tax year, large and mid-sized businesses did not pay £7.7bn in taxes, an area where HMRC is having some success as non-compliance has fallen from 18% of the tax gap given years ago.

This clearly illustrates the negative impact of the pandemic on HMRC compliance work as staff were redeployed to covid-related schemes rather than chasing recalcitrant taxpayers.

Phil Kinzett-Evans, Partner at UHY Hacker Young, said: ‘HMRC is particularly focused on raiding businesses that abused BBLS and CBILS – it wants to catch fraudsters and recover these funds.

‘Takeaways and shops that used so-called ‘zappers’ to reduce their sales for tax purposes are also in HMRC’s crosshairs. Those who didn’t come forward to confess when they had the chance can expect a knock on the door from HMRC.

‘If your business is ‘unusually unprofitable’ for its size and market, HMRC’s systems are likely to flag you as a risk for underpaid tax. Getting out ahead of that problem by engaging an accountant to deal with HMRC on your behalf can help avoid costly investigations and raids.’

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