The Treasury is losing £40bn a year due to a shadow economy where firms and individuals deliberately hide from HMRC, claims a leading tax justice campaigner.

The report, which was published this week by tax campaigner, Richard Murphy, was swiftly rejected by HMRC as “seriously flawed”, despite it being reviewed by academics and other tax experts.

If the findings of the report are correct, the scale of tax evasion from sales going unreported to the tax man would be four times as big as official figures suggest. HMRC estimated last year that the shadow economy and evasion was costing it £10.5bn.

Murphy’s estimates only a minority of tax lost to the shadow economy relates  to self-employed workers. He said the majority comes from 1.1m companies that tell HMRC they trade in the UK at an average loss of about £10,000, and from a further 400,000 companies he estimates trade in the UK but do not file a tax return at all.

A spokesperson for HMRC said:

“We don’t recognise the estimate of tax lost to companies. We are extremely good at identifying companies which need to send in a tax return, pursuing overdue returns and generally protecting tax payable when a return doesn’t appear.”

Murphy is an accountant and tax expert who, until March last year, sat on an HMRC panel of anti-avoidance experts. He has been leading a campaign questioning the accuracy of HMRC figures on Britain’s tax gap for the past few years.

His recent report, which consists of three peer-reviewed papers, is expected this summer and has been funded by Oxfam, the Joseph Rowntree Charitable Trust, the TUC and the PCS union. The first paper will be published today.

Green Party MP Caroline Lucas, told the Guardian:

“Successive governments have failed to get to grips with the tax gap and this new research highlights anew just what that costs Britain. We urgently need this problem to be taken seriously by ministers, not least to help expel the myth that we need the austerity measures and public spending cuts that continue to impact so severely on the least well off.”

Photo by HMRC