Understanding evasion by small and mid-sized businesses

HMRC has published research report 433, Understanding evasion by small and mid-sized businesses, which looks at what causes businesses to engage in tax evasion and whether they hold particular attitudes making them more likely to seek to evade tax. We are pleased to note that using an agent seemed to limit engagement in evasion by the majority.

The particular attitudes of business owners, which differentiate evading and non-evading businesses, are listed as:

  1. Sense of citizenship - an individual’s core values and beliefs
  2. Distinction between personal and business assets - the extent to which business affairs and assets are kept separate from an individual’s own (or family) affairs and assets
  3. Perceived risk - both in terms of the risk itself, and the business’ ability to manage or mitigate risks
  4. Perceived financial imperative or reward
  5. Willingness to seek out or create opportunities to evade: the degree of strategic planning involved in evasion activity.

The report goes on to link the five attitudinal variables summarised above with external influences, ie, social norms, media noise, market pressures and agent use, to determine four core types of evader:

  1. Unthinking evaders, for whom low level evasion is habitual, and often adopted without thought
  2. Invested evaders, for whom evasion is seen as an unfortunate financial necessity in order to grow or to stay in business (where they believe the end justifies the means)
  3. Lifestyle evaders, for whom evasion enables a life-style otherwise out of their reach, which they feel is justified by the taxes they do pay
  4. Systematic evaders, where evasion is actively considered and integral to the business model.

The research was conducted with a relatively small number of businesses (40 small and 5 mid-sized), but did pick up some behaviours which will sound familiar. It is worth noting that the sample for this research was only businesses which were actually engaging in tax evasion, so although on reading the report, it appears that evasion must be rife because so many examples are given, they are not statistically representative of the sector.

The sort of evasion reported ranged from the obvious, so businesses which dealt with cash paying customers had more opportunity to under-declare income, to those employing their teenage school children who were not really working, but whose personal allowances could be used to ‘save’ tax. There were those business owners who over-claimed personal (but related) expenses which could feasibly have been actual business expenses, and also those who bought new assets for their business (eg a computer), but who then used these at home and took the old home one for business use.

Clearly these will all mount up in terms of lost tax to the economy, but quite how much it contributes to the £5.2bn tax gap estimated to attribute to this sector by HMRC, it is difficult to conclude from this research.