Treasury Committee

Tuesday 30th June 2026

(began 2 months, 3 weeks ago)

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None Portrait Speaker 4
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Uh, yes, I do. Thank you, chair. Um, there is no doubt that there is a proliferation of rates avoidance. Uh, it's probably, um, caused mainly by the empty property charges. So, um, business rates are chargeable to 100% on empty properties after a, a, a period of time. Um, what, in terms of the short term occupation. So for commercial property, three months, industrial property, six months after that initial um business. Rate relief, it becomes fully chargeable at 100% for empty rates.

So um. Rather than being incentivised to um, find new. Um permanent. Um landlords are. Incentivised to find anybody that will uh, rent a property, even if it's for a short term, which sort of makes two things there because you've talked about what I would describe as phoenixing, which is an issue in its own right where occupiers, um, one business is only to replace them by another business and it's normally the same, same occupiers. That's the, the basic definition of phoenixing.

Um, and then, and then you've got the other, which is the short term lets that landlords are undertaking. Um, I'd slightly disagree that it's in the millions. I suspect it's in the billions in terms of um rates of. Avoidance. It's the problem you've got is because it isn't recorded anywhere and because it's an application of the law as it stands, it's not illegal. There is no um record. Of how much of this avoidance exists. But we've all seen the examples.

It's now farms. That's one of the. More rare examples. There are far more easier methods of rates avoidance than that particular one.
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None Portrait Speaker 1
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Local as your tenant.
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None Portrait Speaker 2
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There was layers.
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None Portrait Speaker 5
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Um thanks, Jim. Um, so the purpose of tobacco taxation is not really about raising revenue. It's about it's a public health measure to reduce consumption. And the level of tobacco taxation that we have in the UK is one of the key drivers of falling consumption and falling smoking prevalence. So it's been a, I would say, a big success story, really. The and the way that we tax tobacco and have done for for a number of years is to have a tax escalator.

So we predictably increase the rate of taxation above the level of inflation for cigarettes and hand-rolled tobacco and other tobacco products. Um, each year. So I would say that that approach is broadly being correct. And we have managed to increase, decrease the affordability, increase the tax on tobacco at a time that we have brought down the size of the illegal market for tobacco products. So it's the illegal market for tobacco is 90% smaller now than it was in 2000. And that's a combination of effective enforcement, but also falling consumption.

And obviously, you know, the more that we bring smoking rates down, that's like that's the most effective way to reduce the size of the illegal tobacco market. Um, I would say that there are some, uh. The taxation on tobacco is not perfect. And there is more that HMD could look at to, uh, make sure that we close some of the loopholes around tobacco taxation. Um, we have a minimum excise tax for tobacco, which has been an effective way to stop tobacco companies from selling products at very cheap prices to keep people smoking.

But evidence more recently from colleagues at the University of Bath suggests that the minimum excise tax is not as effective as it used to be, that tobacco companies are prepared to sell products at lower prices, whilst sort of making up the shortfall by selling premium products at above the um, you know, over shifting and charging more for those premium products. So there's an issue there that needs addressing. And then we also have some tobacco products which are just not well captured by our existing taxation model cigarillos in particular, which are cigarette like.

They are born of the loopholes that we have in tobacco regulation, because they can be branded, sold with flavours and the way that cigarettes can't. But they look identical to cigarettes and are also taxed at a lower level. Um, you know, perpetuating people's consumption of tobacco. We still have a gap between hand-rolled tobacco and um factory made. Barettes which should be closed over time as well. And then there are other tobacco products which, uh, attract a lower level of taxation, which should also be looked at.

So one of the key things that we would very much like the Treasury to do is to review the way that tobacco is taxed, uh, and nicotine products, because we're about to bring in an excise tax on, on vaping products. And we have other novel nicotine products on the market, which are, which don't currently attract an excise tax. So we'd really welcome the Treasury and perhaps this committee, looking further at how the tobacco and nicotine tax regime works, its public health objective and how that's, um, how that could be improved in order to, to further improve public health.
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None Portrait Speaker 5
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The long term trend is is down on illicit tobacco. So we've as I say, you know, it's gone from, you know, something?I'll try and remember the actual figures, uh, that the so, for example, hand-rolled tobacco in 2000, 60% of the market for hand-rolled tobacco was illegal. And today 19% of cigarettes sold, uh, are illegal. So obviously that's still a sizeable problem. But it's nothing like the problem that we had. Uh, you know, we had 20 years ago.

Um, and that's in a context of more smokers, uh, a higher proportion of smokers now use hand-rolled tobacco than did in the past. So there is lots to, uh, I, I would say, I mean, perhaps controversially, there's lots to applaud HMRC for in terms of the broader strategy to reduce, uh, the, the illicit market, um, whether. There is, uh, some. You know, the broader trend is, is down and as you say, there might be some, uh, we often get some sort of bumping around with, um, uh, the numbers going up and down over different years, but the long term trend is down.

Uh, what we see from tobacco companies is to very much play up any indication that the illegal market might be growing because it suits their objectives. You know, they don't want to see tobacco regulated as heavily as it is. They want to see lower taxes. And they certainly want to make the these arguments in other countries and other jurisdictions that might look to emulate the United Kingdom in terms of both our regulation and our tax regime. And so we see an awful lot of energy going in from tobacco companies into making a case that the illegal market in the UK is somehow out of control or, you know, rapidly growing, which the evidence does not support.

It's not to that's not to say that there's no issue at all with the illegal market, and there's no action that we should take. But HMRC have a £100 million strategy to tackle illegal tobacco. That is, you know, a combination of overseas intelligence gathering, working multi-agency international level, controlling the import at the borders, which is absolutely crucial for and I would, I would think is probably relevant to other products that we see, um, illegal products where.
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None Portrait Speaker 5
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I don't think those two numbers are incompatible. Um, I think it's we know that people say something like 1 in 10 people are prepared to buy illegal tobacco, but it doesn't mean all of the tobacco that they're purchasing is illegal. Um, so I think that it's totally reasonable that 14% of the market is illegal tobacco, but there are a higher number of people that would be prepared to purchase illegal tobacco, or indeed might do across a month. Um, so I think those are not incompatible.

And I think you're, but what I would dispute is whether this is a growing or a growing problem, because I don't think that the evidence that we currently have supports that it's there, um, kind of rapidly growing concern. We certainly seen, um, reports coming, particularly sponsored by, um, by tobacco. Companies that, uh, do not have very transparent methodologies and often use methodologies which are disputed, which give us a. Picture of the illegal market, which would suggest, you know, very, very high levels of concern about the size if you were to take their numbers at face value.

But I think we have to treat them with caution. But in terms of is there more that we could be doing as HMRC doing enough?Is the is the strategy that we've got sufficient?Like, obviously there are more things that we could be doing. I would say that there's, you know, the track and trace system, the, the investment that we have at borders and internationally is all very, very good. There has been more recent investment through Department of Health in um, trading standards, capacity to address tobacco and vaping to, to enable them to enforce the law.

Because you're completely right, trading standards has been stripped back and the boots are simply not there on the ground to be able to enforce the law sufficiently. So I think it's very welcome that the Department of Health are putting additional investment in. And I do wonder if that's a model in some of these other areas where there's, um, benefits to public health from reduced consumption of illegal products, whether there's a role for the department in relation to trading standards more broadly. Um, and I would, I would certainly like to see more being done around trying to, um, change the, we've got some good examples regionally where there have been regional campaigns to encourage smokers not to use illegal tobacco to dissuade, you know, through mass media campaigns, to dissuade them, not to engage with the criminality.

And I think that would be a useful additional plank to the strategy.
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None Portrait Speaker 3
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I'll talk.
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None Portrait Speaker 2
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I think it's easy to have a go at HMRC and the tax cap and we do it. Um everybody does it. They must get so sick of it. But and it is world leading in many ways. And every year it gets a little bit more accurate, a little bit more accurate. But one of the problems is bigger. Well every time they dig deeper, the number gets bigger. And that to me is informative.

And particularly when they get challenged on something like Phoenixing until five years ago, when I talked to senior people at HMRC, they would say the whole phoenixing thing. It's yeah, it hurts a little bit, but it's a myth. The barber shops are a myth. The souvenir, I was told they were a myth. Yeah, and you only have to pick up Private Eye to go. Yeah. So so it was a, it was a myth. Um, and then when the pressure's on and they dig.

Oh, actually it's a big number or R&D credit, R&D claims by small business. It's not that big a number pressure dig big number. And that's what worries me. That worries me that that the whole of the small business portion of the tax gap, which is that 62% of 60 billion, is based on a sample of 300 businesses. And other countries, when they calculate their tax gaps, use much bigger samples of small business that they dip into in order to form a point of view.

So I think it would be now maybe HMRC would say it's a bit like Poland. Once you've got a representative sample, you don't need to increase the size of the poll. And a representative sample for poles is 270 million people. But I think it would be nice to challenge HMRC and say. Widen the sample. You know, the equivalent in Canada is about is in thousands. So widen the sample and let's see what it throws up.

But my experience have been every time they are challenged to dig the number balloons.
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None Portrait Speaker 2
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So what I would say our relationship with with HMRC is a bit Marmite and they love us and they love us because we say, yeah, let's get more tax. People pay more tax and they hate us because we're saying you're not doing the job well enough. So it's depending on who we talk to. It's it smiles off, groans. But what I would say is they are things are changing for the better. The fact that the new government's going to announce this 5000, 5500 extra compliance officers, 350 of which will be dedicated to small business tax avoidance is really welcome.

The new 50 person unit that's going to be in the National Crime Agency feels like people have finally woken up to something that, to be honest, was out there for a decade. Um, and why it matters so much is I think that the UK tends to be quite blessed compared to other nations is we have very high degrees of what's called tax morale. People will pay their taxes, by and large in this country. And there's lots of other countries where that isn't the case.

But we in the UK, people will generally pay the taxes if they think everyone else is paying. That's the crucial thing. And I think that worries me so much about the high street tax dodging. And it is. Is it so in your face?And it's so pervasive that I think it must at some point it's going to weaken tax morale in this country. And that's why it needs to be hit hard. And the sanctions for me are not about when you catch them and you get the company behind it and you stop them being a director for a few years, I would make them personally liable for any taxes due.

I would remove the limited liability status from the individuals of people who serially abuse companies that hundred pound for limited liability status in this country.
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None Portrait Speaker 5
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I mean, other.
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None Portrait Speaker 8
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Than health risks.
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None Portrait Speaker 4
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Okay. Um, first of all, it's important to note that small business rate relief. So any property that's got a value rateable value of less than £12,000 won't have any liability for business rates. Now that doesn't really apply in, in London, but certainly in, in the provinces, most of the high street shops would not be paying business rates. They get 100% small business rate relief of the the smaller size. Um, the difficulty that, uh, my colleagues face in relation to the business rates is um.

Establishing who is in occupation. So getting the liability right is very difficult. Um, a lack of information. Um landlord there is no law that requires a landlord to notify the council of who, who they've put into occupation. Um so it's a matter of the local authority finding who is, who is liable. Um which. I think is a, a, a definite weakness in the law. There should be a requirement upon landlords to be notifying their is in council tax and landlords required if asked to tell you who's in occupation.

Um that doesn't apply equally in businesses. Um that creates difficulties. The. Um. The difficulty around complex leases you see more of in business rates. So you'll get multi-layer leases. So finding out who an owner is, um, because an owner is defined as the person entitled to possession, which isn't necessarily the freeholder, it's the person entitled. It could be a 25 year lease and there could be a number of leases under that. That makes it difficult to be able to establish.

And, and above all, the issue you face is where a landlord is using legal avoidance. Um, so he is, he's, he's set upon a scheme to avoid the rates. Um, they're not, in, they're not working on the same side as the local authority who is wanting to make somebody liable.
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None Portrait Speaker 4
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Yes, indeed. Indeed.
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None Portrait Speaker 3
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Um.
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None Portrait Speaker 7
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Revival.
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None Portrait Speaker 4
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Um I have this now form one that, that was an early wheeze, let's put it that way. You don't see as many of them as you, as you did because it's, it's sort of been proven to be not, not normally a suitable environment for producing. Cells that can, should be farmed for human consumption. Um, but you've got, you've, you've got charities occupying properties that it's sometimes hard to see what the, the public benefit is to that charity, but they are a registered charity and so they're entitled to 80% mandatory rate relief.

Uh, you've. Got the special purpose vehicle company set up that go into immediately into members voluntary liquidation, that sort of, um, narrowed down a little bit over the years because some councils have, have fought cases. Um, and the owners were found liable because they um. Retained control of the property. Phoenixing that we've mentioned already, um guardianship schemes, you see, uh, there was a. Rather famous case called Ludgate house in, in London with Southwark that involved um a number.

Of guardians occupying a very, very large building and there were only a handful of guardians and they were trying to claim that it should be a maximum of band eights Council tax because it's now a domestic property. I've seen, uh, Bluetooth boxes. So um, there's a. Occupation is occupation. So if you're going to occupy, it's similar to the box shifting one. But if you're going to occupy, um, to, in order to get that 3 or 6 month exemption, you want to do it in the most conservative way possible, make sure it's occupation, but not so that it's costing you a lot of money emptying it out at the end of it.

So I've seen examples of large offices with one Bluetooth, um, machine in. That's um, sending out messages and claiming that that's occupied the box shifting that we've mentioned already that really that's just short term occupation in, in and out. You see that quite a lot.
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None Portrait Speaker 3
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Yeah.
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None Portrait Speaker 3
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Okay.
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None Portrait Speaker 2
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I think some. I think we have very weak sanctions in this country, and they are less and less frequently implemented. So the UK Public's Account Committee in 25 criticised HMRC for the fall in the number of criminal prosecutions for tax evasion. Um and it fell again since they had they made that criticism. It's down again. Um I look at the same trends visible when it comes to prosecuting the enablers of tax evasion, which is reduced by 70% in the last five years.

Uh, we're talking a handful of people basically being prosecuted. And the killer for me is the new law that was introduced nine years ago, which was designed to prosecute people who facilitated tax evasion. There has been one prosecution to date in nine years. And if you talk to people at HMRC, the problem is the burden of proof to get a prosecution is so ridiculously high it is impossible to get a prosecution, not even one conviction, one prosecution in nine years. So I think it's incumbent on all of us, in a way, sometimes to design the legislation in a way that it actually can bite.

That is obviously a piece of legislation that is impossible to base. So I still think that this this this general thrust I see right now, though, which is the way we deal with Phoenix ism, is we simply identify the directors and we ban them for a few more years. That's not going to do anything, in my opinion. We have to go. You know, people have to think if they are fraudulently doing this year after year, there are cars on the line, there are houses on the line.

That is the only way we we get to this. It is interesting, though, that RSM did a Freedom of information request very recently, and they did say that HMRC is now deploying more frequently personal liability notices and joint and several liability notices, and that's something that the government has been urging them to do. I don't have a sense yet, though is are things up by 10%?Are they up by 50%?Are they up by 300%?But that's the direction of travel because the way tax avoidance works in this country is, is once a.

A scam is invented. The Snell farm or the box scheme or the Phoenix. Uh, and people see it, it just it's like wildfire. It goes through the country and all the accountants know about it and all the businesses know about it. And then I met a guy just at a conference last week, financial services conference. He was literally crying, saying every one of my he was a decent man, an accountant. He said, every one of my clients asks me to do this, this and this, which is fraudulent because their accountant lets them do this, this and this, and they tell me they'll move if I don't do it.

And how does he act in that circumstance?So we have to find a way to, when these wildflowers start to put them out immediately, and we'll put them out immediately. If people do time.
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None Portrait Speaker 3
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Mr. Cheeseman.
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None Portrait Speaker 2
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I'm not aware of any bespoke studies in the UK. I am aware that the IMF and the world Bank have done international studies where they try to look at what is the impact in countries where tax evasion and criminality is poorly policed, for example, on. And the effect that has on legitimate business. And they, for example, identify a massive reduction in productivity in those localities in the countries, because the inefficient tax avoiding businesses push out the, the efficient, uh, tax compliant businesses. But I'm not aware of your exact question.

I'm not aware of what that number is. It would just be anecdotal. It would just be that there's a number of businesses we talk to who, who, who we have met who say, I can't operate in that sector now because I can't price against that. It's just impossible to price against it. And I think one of the problems we've still got in this country is that we still have this obsession of that the UK will be the easiest and quickest place to establish a small business.

We've still rooted in this obsession where you can establish a business in UK in 24 hours. It will only cost you £100 £100. Limited liability. It used to be £15, only cost you £13 to shut the business down at the back end, which is insane. So it's not just cheap to establish a business, it's cheap to shut a business and we worry why we've got so much phoenixing. So look at the UK company register. We were told when we introduced the Economic Crime and Transparency Bill, we all assumed that the measures in that would see it shrink and that that would be a good thing.

It's grown again. The latest stats from companies House at 5.7 million businesses on the UK company register. So I still think it's the case that there is at least tens of thousands of fraudulent businesses on it, if not hundreds of thousands. So until we grasp the nettle of this obsession, right, how on earth can any agency do compliance when the UK says you can have a business in 24 hours?How can any agency police when 830,000 new businesses established in the UK in.

In 2025, there's only 2000 people in companies House and they get to set it up in 24 hours. So we need to break the cycle. I would double I would move to at least £250 as the cost of establishing a business in this country, which is the norm for Europe. All that money would get ploughed back into companies House, which would be revenue neutral. Actually, it'd be positive because they'd shut people down. Um, we need to get we need to.
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None Portrait Speaker 8
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Um.
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None Portrait Speaker 3
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Mr. Monahan.
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None Portrait Speaker 2
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I think there needs to be higher barriers to create businesses, and I know that goes against the grain in in in some ways. But but there's a reason we have the most bloated company register in the world. There's a reason that we've got a company register full of hundreds of thousands of fraudsters. And just this, you know, the Insolvency Service has just recently shut down five illegal company service providers, which between them had set up 12,000 illegal companies in the UK. And we're only halfway through the year and we've got a problem in this country that the obsession to set it up cheap and quick creates all the other problems.

And Phoenixing is so rife here because it's so easy to do, because the cost of setting up a business is 100 here, and it's £13. And because the sanctions, when you're caught, are less than if you're caught littering. And until we deal with that. And that's what in many ways, Phoenixing is driving the the abuse of the the vacant properties because they can step in for a few hundred quid. So I think we really do. And one last thing is, is the government again, it's good that they're now requiring that abridged accounts can no longer be filed at HMRC because HMRC previously was only seeing the British accounts.

And that's going to be that's going to be ruled out from 2028. But we have still. And those accounts are to go on the company register. But we've now allowed that that a business can actually say if they don't want their small business reporting accounts on the company register, that shouldn't be allowed, because I'll tell you exactly the businesses who are going to not make that public. It's these businesses.
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None Portrait Speaker 3
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Do you.
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None Portrait Speaker 2
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Sorry, sorry, sorry.
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None Portrait Speaker 8
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Thank you. Monahan.
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None Portrait Speaker 12
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28 might be too late.
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None Portrait Speaker 5
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I mean, I would say that there are many things that are going to come into force before the licensing regime does that will help with the issues that we see on the high street around non-compliant vaping products or products being sold underage and so on. I mean, I think, you know, from an ash point of view, we think vapes are less harmful than smoking. They are valuable tools to help people stop smoking. But the way that we see them on our high street at the moment is not appropriate.

So we expect restrictions to come in around the way that products can be displayed so that they are put out of sight. And when the same restrictions came in for tobacco, we saw a lot of these sort of more informal settings that were selling tobacco, stopped selling tobacco. So we would expect to see a similar phenomenon around vaping products. So the the many weird and wonderful places you can currently buy, buy, vape will probably start to, to decline the introduction of the excise tax in October because of the additional requirements to to buy tax stamps ahead of time.

Probably going to see a slimming down of the importers and manufacturers of vaping products. It may also have an impact on on retail. And we would expect as well for it to help with the control of products coming in at the border. So we don't have kind of non-compliant products and non-duty paid products. So, you know, those things will already help. And there are there are other things in the Tobacco and Vape Act that I think will also help to address.

Uh, the, the kind of the, it will raise the cost of selling vapes on the high street. There will be more enforcement capacity from trading standards to enforce the new vaping regulations. And there will be new resources from HMRC around the excise tax. So there should be more things coming. And then we will have a licensing regime that will come further down the line. I think it's really important that that licensing regime um is. Uh, has.

A kind of public health objective, both on the tobacco side and on the nicotine side. Um, it's really important that it is seen as a public health tool. Um, really important that we have a national system that enables us, unlike with alcohol to really understand, you know, if you've been prevented, if you've had your licence taken away from you, if you've been sanctioned in, in one local authority, you can't move to another one and set up. Um, and that the powers that are currently in the act that relate to where, uh, there is, uh, an ability for the licensing regime to be structured so it can limit where licences are granted or how many licences are granted.

And those powers need to be retained. And I, you know, the responsibility given to local government to understand its community and where it does and doesn't need these retail outlets. So, I mean, hopefully that's, um.
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None Portrait Speaker 5
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So I think the, the illicit so the reducing the number of informal places that are selling products. I think we have a combination at the moment with vaping products where, uh, you've got people who are very, you know, just not very experienced in relation to these products and are inadvertently selling products that don't meet UK standards. That will be much harder once we have a tax stamp. And it's, you know, it's really clear whether whether something is, um, you know, legally imported or not.

Um, so I think that will help with the kind of inadvertent stuff and then the more deliberate criminality. I mean, I think it's all, you know, there's a, there's a market for vapes, there's a market for tobacco products and there is criminality on the high street. So we can do things at the border to prevent the flow of illegal products coming in. You know, we can do things internationally to, to kind of disrupt criminal networks, and we can do things on the high street to disrupt the illegal supply.

But all the, you know, the various different things we've been talking about today, the kind of underlying structural problems, the, the organised crime that is out there. You know, we need we need tools that are outside the Tobacco and Vape Act and outside of our kind of illicit tobacco and vaping strategies that I think are about what my colleagues here have been talking about, probably more outside my expertise for sure. Uh, in order to make, you know, if criminals are setting up shop and wanting to make a profit and illicit tobacco is available, they're going to sell those products.

We could do what we can to limit the supply, but we also have to tackle that high street criminality as well. And that goes beyond, I think, the remit of, you know, the people working in tobacco control and generally speaking. But what I would also say is, because we have seen this growth, what I hear from Trading Standards colleagues is, um, more. More and more there is organized crime involved in the sale of illegal tobacco in particular. And, you know, probably in due course in relation to a legal vapes as well.

And there is a limit to what trading standards can do on their own. When you have organised crime and criminality and violence surrounding these things. And, and we've talked about inter-agency working and we need that inter-agency working on the high street as well, that, you know, law enforcement are alongside trading standards, uh, when they are enforcing these laws to make sure that, that trading standards are protected as well from the criminality that is associated with these products.
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None Portrait Speaker 3
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Okay.
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None Portrait Speaker 3
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Thank you very much. I think we're going to hear more from Miss Mints on that clearly. Um, can I thank our witnesses very much indeed. We've had a very interesting discussion and I should alert witnesses and members that the Exchequer Secretary has told me he's going to be watching closely what was said today. So I think there's food for thought for the government there. And we are expecting HMRC to come in front of us in the autumn. We hope there's a nudge to them and the Exchequer Secretary at some point thereafter.

Um we've I think five departments work actually in discussions today. So it shows, I think, some of the complexity of tackling this issue. So um, we're very grateful to our witnesses. That's Paul Monaghan chief executive of the Fair Tax Foundation. Hazel Cheeseman, chief executive of Action on Smoking and Health. And Alison Townsend, who's a fellow and past president of the institutes for revenues, ratings and valuation. The transcript of this session will be available on the website uncorrected in the next couple of days, with thanks to our colleagues at Hansard.

Thanks to our colleagues at Bow Tie for the broadcasting order. Order, order!Welcome to the Treasury Select Committee on Tuesday, the 30th of June 2026. Today we're looking at tax and duty non-compliance on high streets. So this is some of those shops that Phoenix that's set up in. Order. Order, order. Welcome to the Treasury Select Committee on Tuesday, the 30th of June 2026. Today we're looking at tax and duty non-compliance on high streets.

So this is some of those shops that Phoenix that's set up and then closed down and re-establish. And we are concerned as a committee about how a number of these businesses are not paying their fair share of tax. So we're here to talk to an expert panel today as our first foray into this area of work. And I'm delighted to welcome from. My left to right Paul Monahan, who's the chief executive of the Fair Tax Foundation, Hazel Cheeseman, who's the chief executive of Action on Smoking and Health UK, often referred to as Ash, and Alistair.

Townsend, who's a fellow and past president of the institutes for Revenue's ratings and valuation. Evaluation IRR for. Short. So a very warm welcome to you all and we will be directing questions to you. But if you feel you're not the right person to answer, please do correct and deflect to another witness. And I'd like to ask Dame Sean McDonough to kick off Dame Siobhan.
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None Portrait Speaker 3
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Who's that to.
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None Portrait Speaker 1
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Um whoever fails.
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None Portrait Speaker 4
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Uh, yes, I do, thank you, chair. Um, there is no doubt that there is a proliferation of rates avoidance. Uh. It's probably, um, caused mainly by the empty. Property charges. So, business rates are chargeable to 100% on empty properties after a, a a period of time. Um. What in terms of the short term occupation. So for commercial property, three months. Industrial property six months after that initial business.

Rate relief. It becomes fully chargeable at 100% for empty rates. Um. Rather than being incentivised to. Find new permanent tenants. Landlords are incentivised to find. Anybody that will rent a property, even if it's for a short term. Which sort of makes two things there. Because you've talked about what I would describe as Phoenixing, which is an. Issue in. My own right where occupiers. Is only to replace them.

By another business. And it's normally the same, same occupiers. That's the the basic definition. Phoenixing. Um, and then, and then you've got the other, which is the short term lets that landlords are. Undertaking. Um, I'd slightly disagree that it's in the millions. I suspect it's in the billions in terms of um rates avoidance. It's the problem you've got is because it isn't recorded anywhere and because it's an application of the law.

As it stands it's not illegal. There is no um. Record of how much of this avoidance. This exists. But we've all seen the examples of snail farms. That's one of the. More rare examples there are far more easier methods. Of avoidance than that particular one.
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None Portrait Speaker 1
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Local as your tenant.
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None Portrait Speaker 2
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There was layers.
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None Portrait Speaker 5
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Um thanks, Jim. Um, so the purpose of tobacco taxation is not really about raising revenue. It's about it's a public health measure to reduce consumption. And the level of tobacco taxation that we have in the UK is one of the key drivers of falling consumption and falling smoking prevalence. So it's been a, I would say, a big success story, really. The and the way that we tax tobacco and have done for for a number of years is to have a tax escalator.

So we predictably increase the rate of taxation above the level of inflation for cigarettes and hand-rolled tobacco and other tobacco products. Um, each year. So I would say that that approach is broadly being correct. And we have managed to increase, decrease the affordability, increase the tax on tobacco at a time that we have brought down the size of the illegal market for tobacco products. So it's the illegal market for tobacco is 90% smaller now than it was in 2000. And that's a combination of effective enforcement, but also falling consumption.

And obviously, you know, the more that we bring smoking rates down, that's like that's the most effective way to reduce the size of the illegal tobacco market. Um, I would say that there are some, uh. The taxation on tobacco is not perfect. And there is more that HMD could look at to, uh, make sure that we close some of the loopholes around tobacco taxation. Um, we have a minimum excise tax for tobacco, which has been an effective way to stop tobacco companies from selling products at very cheap prices to keep people smoking.

But evidence more recently from colleagues at the University of Bath suggests that the minimum excise tax is not as effective as it used to be that tobacco companies are prepared to sell products at lower prices, whilst sort of making up the shortfall by selling premium products at above the um, you know, over shifting and charging more for those premium products. So there's an issue there that needs addressing. And then we also have some tobacco products which are just not well captured by our existing taxation model cigarillos in particular, which are cigarette like.

They are born of the loopholes that we have in tobacco regulation, because they can be branded, sold with flavours and the way that cigarettes can't. But they look identical to cigarettes and are also taxed at a lower level. Um, you know, perpetuating people's consumption of tobacco. We still have a gap between hand-rolled tobacco and um factory made. Barettes which should be closed over time as well. And then there are other tobacco products which, uh, attract a lower level of taxation, which should also be looked at.

So one of the key things that we would very much like the Treasury to do is to review the way that tobacco is taxed, uh, and nicotine products, because we're about to bring in an excise tax on, on vaping products. And we have other novel nicotine products on the market, which are, which don't currently attract an excise tax. So we'd really welcome the Treasury and perhaps this committee, looking further at how the tobacco and nicotine tax regime works, its public health objective and how that's, um, how that could be improved in order to, to further improve public health.
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None Portrait Speaker 5
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The long term trend is is down on illicit tobacco. So we've as I say, you know, it's gone from, you know, something?I'll try and remember the actual figures, uh, that the so, for example, hand-rolled tobacco in 2000, 60% of the market for hand-rolled tobacco was illegal. And today 19% of cigarettes sold, uh, are illegal. So obviously that's still a sizeable problem. But it's nothing like the problem that we had. Uh, you know, we had 20 years ago.

Um, and that's in a context of more smokers, uh, a higher proportion of smokers now use hand-rolled tobacco than did in the past. So there is lots to, uh, I, I would say, I mean, perhaps controversially, there's lots to applaud HMRC for in terms of the broader strategy to reduce, uh, the, the illicit market, um, whether. There is, uh, some. You know, the broader trend is, is down and as you say, there might be some, uh, we often get some sort of bumping around with, um, uh, the numbers going up and down over different years, but the long term trend is down.

Uh, what we see from tobacco companies is to very much play up any indication that the illegal market might be growing because it suits their objectives. You know, they don't want to see tobacco regulated as heavily as it is. They want to see lower taxes. And they certainly want to make the these arguments in other countries and other jurisdictions that might look to emulate the United Kingdom in terms of both our regulation and our tax regime. And so we see an awful lot of energy going in from tobacco companies into making a case that the illegal market in the UK is somehow out of control or, you know, rapidly growing, which the evidence does not support.

It's not to that's not to say that there's no issue at all with the illegal market, and there's no action that we should take. But HMRC have a £100 million strategy to tackle illegal tobacco. That is, you know, a combination of overseas intelligence gathering, working multi-agency international level, controlling the import at the borders, which is absolutely crucial for and I would, I would think is probably relevant to other products that we see, um, illegal products where.
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None Portrait Speaker 3
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I I'll bring you in.
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None Portrait Speaker 8
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I don't think those two numbers are incompatible. Um, I think it's we know that people say something like 1 in 10 people are prepared to buy illegal tobacco, but it doesn't mean all of the tobacco that they're purchasing is illegal. Um, so I think that it's totally reasonable that 14% of the market is illegal tobacco, but there are a higher number of people that would be prepared to purchase illegal tobacco, or indeed might do across a month. Um, so I think those are not incompatible.

And I think you're, but what I would dispute is whether this is a growing or a growing problem, because I don't think that the evidence that we currently have supports that it's there, um, kind of rapidly growing concern. We certainly seen, um, reports coming, particularly sponsored by, um, by tobacco companies that, uh, do not have very transparent methodologies and often use methodologies which are disputed, which give us a. Picture of the illegal market, which would suggest, you know, very, very high levels of concern about the size if you were to take their numbers at face value.

But I think we have to treat them with caution. But in terms of is there more that we could be doing as HMRC doing enough?Is the is the strategy that we've got sufficient?Like, obviously there are more things that we could be doing. I would say that there's, you know, the track and trace system, the, the investment that we have at borders and internationally is all very, very good. There has been more recent investment through Department of Health in, um, trading standards, capacity to address tobacco and vaping to, to enable them to enforce the law.

Because you're completely right, trading standards has been stripped back and the boots are simply not there on the ground to be able to enforce the law sufficiently. So I think it's very welcome that the Department of Health are putting additional investment in. And I do wonder if that's a model in some of these other areas where there's, um, benefits to public health from reduced consumption of illegal products, whether there's a role for the department in relation to trading standards more broadly. Um, and I would, I would certainly like to see more being done around trying to, um, change.

The, we've got some good examples regionally where there have been regional campaigns to encourage smokers not to use illegal tobacco to dissuade, you know, through mass media campaigns, to dissuade them not to engage with the criminality. And I think that would be a useful additional plank to the strategy.
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None Portrait Speaker 5
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I think it's easy to have a go at HMRC and the tax cap and we do it. Um everybody does it. They must get so sick of it. But and it is world leading in many ways and every year it gets a little bit more accurate, a little bit more accurate. But one of the problems is bigger. Well every time they dig deeper, the number gets bigger. And that to me is informative. And particularly when they get challenged on something like Phoenixing until five years ago, when I talked to senior people at HMRC, they would say the whole phoenixing thing.

It's yeah, it has a little bit, but it's a myth. The barbershops are a myth. The souvenir, I was told they were a myth. Yeah. And you only have to pick up Private Eye to go. Yeah. So so it was a, it was a myth. Um, and then when the pressure's on and they dig. Oh, actually it's a big number or R&D credit, R&D claims by small business. It's not that big a number pressure dig big number.

And that's what worries me. That worries me that that the whole of the small business portion of the tax gap, which is that 62% of 60 billion, is based on a sample of 300 businesses. And other countries, when they calculate their tax gaps, use much bigger samples of small business that they dip into in order to form a point of view. So I think it would be now maybe HMRC would say it's a bit like Poland. Once you've got a representative sample, you don't need to increase the size of the poll.

And a representative sample for poles is 2000 of 70 million people. But I think it would be nice to challenge HMRC and say. Widen the sample. You know, the equivalent in Canada is about is in thousands. So widen the sample and let's see what it throws up. But my experience have been every time they are challenged to dig the number balloons.
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None Portrait Speaker 5
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So what I would say our relationship with with HMRC is a bit Marmite and they love us and they love us because we say, yeah, let's get more tax. People pay more tax and they hate us because we're saying you're not doing the job well enough. So it's depending on who we talk to. It's it smiles off, groans. But what I would say is they are things are changing for the better. The fact that the new government's going to announce this 5000, 5500 extra compliance officers, 350 of which will be dedicated to small business tax avoidance is really welcome.

The new 50 person unit that's going to be in the National Crime Agency feels like people have finally woken up to something that, to be honest, was out there for a decade. Um, and why it matters so much is I think that the UK tends to be quite blessed compared to other nations is we have very high degrees of what's called tax morale. People will pay their taxes, by and large in this country. And there's lots of other countries where that isn't the case.

But we in the UK, people will generally pay the taxes if they think everyone else is paying. That's the crucial thing. And I think that worries me so much about the high street tax dodging. And it is is it so in your face?And it's so pervasive that I think it must at some point it's going to weaken tax morale in this country. And that's why it needs to be hit hard. And the sanctions for me are not about when you catch them and you get the company behind it and you stop them being a director for a few years, I would make them personally liable for any taxes due.

I would remove the limited liability status from the individuals of people who serially abuse companies that hundred pound for limited liability status in this country.
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None Portrait Speaker 8
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I mean, other.
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None Portrait Speaker 11
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Than health risks.
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None Portrait Speaker 7
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Okay. Um, first of all, it's important to note that small business rate relief. So any property that's got a value rateable value of less than £12,000 won't have any liability for business rates. Now that doesn't really apply in, in London, but certainly in, in the provinces, most of the high street shops would not be paying business rates. They get 100% small business rate relief of the the smaller size. Um, the difficulty that, uh, my colleagues face in relation to the business rates is um.

Establishing who is in occupation. So getting the liability right is very difficult. Um, a lack of information. Um landlord there is no law that requires a landlord to notify the council of who, who they've put into occupation. Um so it's a matter of the local authority finding who is, who is liable. Um which. I think is a, a, a definite weakness in the law. There should be a requirement upon landlords to be notifying their is in council tax and landlords required if asked to tell you who's in occupation.

Um that doesn't apply equally in businesses. Um that creates difficulties. The um. The difficulty around complex leases you see more of in business rates. So you'll get multi-layered leases. So finding out who an owner is, um, because an owner is defined as the person entitled to possession, which isn't necessarily the freeholder, it's the person entitled could be a 25 year lease and there could be a number of leases under that. That makes it difficult to be able to establish.

And, and above all, the issue you face is where a landlord is using legal avoidance. Um, so he is, he's, he's set upon a scheme to avoid the rates. Um, they're not, in, they're not working on the same side as the local authority who is wanting to make somebody liable.
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None Portrait Speaker 10
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Revival.
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None Portrait Speaker 7
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Um, I have the snail farm one that, that was an early wheeze, let's put it that way. You don't see as many of them as you, as you did because it's, it's sort of been proven to be not, not normally a suitable environment for producing. Cells that can, should be farmed for human consumption. Um, but you've got, you've, you've got charities occupying properties that it's sometimes hard to see what the, the public benefit is to that charity, but they are a registered charity and so they're entitled to 80% mandatory rate relief.

Um, you've. Got the special purpose vehicle company set up that go into immediately into members voluntary liquidation, that sort of, um, narrowed down a little bit over the years because some councils have, have fought cases. Um, and the owners were found liable because they um. Retained control of the property. Phoenixing that we've mentioned already, um guardianship schemes, you see, uh, there was a. Rather famous case called Ludgate house in, in London with Southwark that involved um a number.

Of guardians occupying a very, very large building and there were only a handful of guardians and they were trying to claim that it should be a maximum of band eights council tax because it's now a domestic property. I've seen, uh, Bluetooth boxes. So um, there's a. Occupation is occupation. So if you're going to occupy, it's similar to the box shifting one. But if you're going to occupy, um, to, in order to get that 3 or 6 month exemption, you want to do it in the most conservative way possible, make sure it's occupation, but not so that it's costing you a lot of money emptying it out at the end of it.

So I've seen examples of large offices with one Bluetooth, um, machine in. That's um, sending out messages and claiming that that's occupied the box shifting that we've mentioned already. Really, that's just short term occupation in, in and out. You see that quite a lot.
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None Portrait Speaker 6
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Yeah.
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Okay.
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None Portrait Speaker 5
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I think some. I think we have very weak sanctions in this country, and they are less and less frequently implemented. So the UK Public's Account Committee in 25 criticised HMRC for the fall in the number of criminal prosecutions for tax evasion. Um and it fell again since they had they made that criticism. It's down again. Yeah. Um I look at the same trends visible when it comes to prosecuting the enablers of tax evasion, which is reduced by 70% in the last five years.

Uh, we're talking a handful of people basically being prosecuted. And the killer for me is the new law that was introduced nine years ago, which was designed to prosecute people who facilitated tax evasion. There has been one prosecution to date in nine years. And if you talk to people at HMRC, the problem is the burden of proof to get a prosecution is so ridiculously high it is impossible to get a prosecution, not even one conviction, one prosecution in nine years. So I think it's incumbent on all of us, in a way, sometimes to design the legislation in a way that it actually can bite.

That is obviously a piece of legislation that is impossible to base. So I still think that this this this general thrust I see right now, though, which is the way we deal with Phoenix ism, is we simply identify the directors and we ban them for a few more years. That's not going to do anything, in my opinion. We have to go. You know, people have to think if they are fraudulently doing this year after year, there are cars on the line, there are houses on the line.

That is the only way we we get to this. It is interesting, though, that RSM did a Freedom of information request very recently, and they did say that HMRC is now deploying more frequently personal liability notices and joint and several liability notices, and that's something that the government has been urging them to do. I don't have a sense yet, though is are things up by 10%?Are they up by 50%?Are they up by 300%?But that's the direction of travel because the way tax avoidance works in this country is, is once a.

A scam is invented. The Snell farm or the box scheme or the Phoenix. Uh, and people see it, it just it's like wildfire. It goes through the country and all the accountants know about it and all the businesses know about it. And then I met a guy just at a conference last week, financial services conference. He was literally crying, saying every one of my he was a decent man, an accountant. He said, every one of my clients asks me to do this, this and this, which is fraudulent because their accountant lets them do this, this and this, and they tell me they'll move if I don't do it.

And how does he act in that circumstance?So we have to find a way to, when these wildflowers start to put them out immediately, and we'll put them out immediately. If people do time.
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None Portrait Speaker 6
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Mr. Cheeseman.
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None Portrait Speaker 5
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I'm not aware of any bespoke studies in the UK. I am aware that the IMF and the world Bank have done international studies where they try to look at what is the impact in countries where tax evasion and criminality is poorly policed, for example, on. And the effect that has on legitimate business. And they, for example, identify a massive reduction in productivity in those localities in the countries, because the inefficient tax avoiding businesses push out the, the efficient, uh, tax compliant businesses. But I'm not aware of your exact question.

I'm not aware of what that number is. It would just be anecdotal. It would just be that there's a number of businesses we talk to who, who, who we have met who say, I can't operate in that sector now because I can't price against that. It's just impossible to price against it. And I think one of the problems we've still got in this country is that we still have this obsession of that the UK will be the easiest and quickest place to establish a small business.

We've still rooted in this obsession where you can establish a business in UK in 24 hours. It will only cost you £100 £100. Limited liability. It used to be £15, only cost you £13 to shut the business down at the back end, which is insane. So it's not just cheap to establish a business, it's cheap to shut a business and we worry we've got so much phoenixing. So look at the UK company register. We were told when we introduced the Economic Crime and Transparency Bill, we all assumed that the measures in that would see it shrink and that that would be a good thing.

It's grown again. The latest stats from companies House at 5.7 million businesses on the UK company register. So I still think it's the case that there is at least tens of thousands of fraudulent businesses on it, if not hundreds of thousands. So until we grasp the nettle of this obsession, right, how on earth can any agency do compliance when the UK says you can have a business in 24 hours?How can any agency police when 830,000 new businesses established in the UK in.

In 2025, there's only 2000 people and companies out and they get to set it up in 24 hours. So we need to break the cycle. I would double I would move to at least £250 as the cost of establishing a business in this country, which is the norm for Europe. All that money would get ploughed back into companies House, which would be revenue neutral. Actually, it'd be positive because they'd shut people down. Um, we need to get we need to and.
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None Portrait Speaker 11
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Um.
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None Portrait Speaker 6
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Mr. Monahan.
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None Portrait Speaker 5
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I think there needs to be higher barriers to create businesses, and I know that goes against the grain in in in some ways. But but there's a reason we have the most bloated company register in the world. There's a reason that we've got a company register full of hundreds of thousands of fraudsters. And just this, you know, the Insolvency Service has just recently shut down five illegal company service providers, which between them had set up 12,000 illegal companies in the UK. And we're only halfway through the year and we've got a problem in this country that the obsession to set it up cheap, cheap and quick creates all the other problems.

And Phoenixing is so rife here because it's so easy to do, because the cost of setting up a business is 100 here, and it's £13. And because the sanctions, when you're caught, are less than if you're caught littering. And until we deal with that. And that's what in many ways, Phoenixing is driving the the abuse of the the vacant properties because they can step in for a few hundred quid. So I think we really do. And one last thing is, is the government again, it's good that they're now requiring that abridged accounts can no longer be filed at HMRC, because HMRC previously was only seeing the British accounts.

And that's going to be that's going to be ruled out from 2028. But we have still and those accounts are supposed to go on the company register, but we've now allowed that that a business can actually say if they don't want their small business reporting accounts on the company register, that shouldn't be allowed, because I'll tell you exactly the businesses who are going to not make that public. It's these businesses.
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None Portrait Speaker 6
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Do you.
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None Portrait Speaker 5
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Sorry, sorry, sorry.
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28 might be too late.
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None Portrait Speaker 8
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I mean, I would say that there are many things that are going to come into force before the licensing regime does that will help with the issues that we see on the high street around, you know, non-compliant vaping products or products being sold underage and so on. I mean, I think, you know, from an ash point of view, we think vapes are less harmful than smoking. They are valuable tools to help people stop smoking. But the way that we see them on our high street at the moment is not appropriate.

So we expect restrictions to come in around the way that products can be displayed so that they are put out of sight. And when the same restrictions came in for tobacco, we saw a lot of these sort of more informal settings that were selling tobacco, stopped selling tobacco. So we would expect to see a similar phenomenon around vaping products. So the the many weird and wonderful places you can currently buy, buy, vape will probably start to, to decline the introduction of the excise tax in October because of the additional requirements to to buy tax stamps ahead of time.

Probably going to see a slimming down of the importers and manufacturers of vaping products. It may also have an impact on on retail. And we would expect as well for it to help with the control of products coming in at the border. So we don't have kind of non-compliant products and non-duty paid products. So, you know, those things will already help. And there are there are other things in the Tobacco and Vape Act that I think will also help to address.

Uh, the, the kind of the, it will raise the cost of selling vapes on the high street. There will be more enforcement capacity from trading standards to enforce the new vaping regulations. And there will be new resources from HMRC around the excise tax. So there should be more things coming, and then we will have a licensing regime that will come further down the line. I think it's really important that that licensing regime um is. Uh, has. A kind of public health objective, both on the tobacco side and on the nicotine side.

Um, it's really important that it is seen as I'm really important that we have a national system that enables us, unlike with alcohol, to really understand, you know, if you've been prevented, if you've had your license taken away from you, if you've been sanctioned in in one local authority, you can't move to another one and set. Um, and that the powers that are currently in the act that relate to where, uh, there is. Uh, an ability for the licensing regime to be structured so it can limit where licenses are granted or how many licenses are granted.

And those powers need to be retained. And I, you know, the responsibility given to local government to understand its community and where it does and doesn't need these retail outlets.
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None Portrait Speaker 8
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So I think the the illicit so the reducing the number of informal places that are selling products. I think we have a combination at the moment with vaping products where, uh, you've got people who are very, you know, just not very experienced in relation to these products and are inadvertently selling products that don't meet UK standards. That will be much harder once we have a tax stamp. And it's, you know, it's really clear whether whether something is, um, you know, legally imported or not.

Um, so I think that will help with the kind of inadvertent stuff and then the more deliberate criminality. I mean, I think it's all, you know, there's a, there's a market for vapes, there's a market for tobacco products and there is criminality on the high street. So we can do things at the border to prevent the flow of illegal products coming in. You know, we can do things internationally to, to kind of disrupt criminal networks, and we can do things on the high street to disrupt the illegal supply.

But all the, you know, the various different things we've been talking about today, the kind of underlying structural problems, the, the organised crime that is out there, you know, we need we need tools that are outside the Tobacco and Vape Act and outside of our kind of illicit tobacco and vaping strategies that I think are about what my colleagues here have been talking about, probably more outside my expertise for sure. Uh, in order to make, you know, if criminals are setting up shop and wanting to make a profit and illicit tobacco is available, they're going to sell those products.

We could do what we can to limit the supply, but we also have to tackle that high street criminality as well. And that goes beyond, I think, the remit of, you know, the people working in tobacco control and generally speaking. But what I would also say is, because we have seen this growth, what I hear from Trading Standards colleagues is, um, more. More and more there is organized crime involved in the sale of illegal tobacco in particular. And, you know, probably in due course in relation to a legal vapes as well.

And there is a limit to what trading standards can do on their own. When you have organised crime and criminality and violence surrounding these things. And, and we've talked about inter-agency working and we need that inter-agency working on the high street as well, that, you know, law enforcement are alongside trading standards, uh, when they are enforcing these laws to make sure that, that trading standards are protected as well from the criminality that is associated with these products.
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