Minimising the Hidden Economy

How HMRC flush out the tax evaders

You would be forgiven for not knowing the difference between tax avoidance and evasion as HMRC, suitably aided by politicians and the media, have blurred the lines to the extent that they appear to be regarded as one and the same. According to the Revenue though tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended.

It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law. Tax evasion is when people or businesses deliberately do not pay the taxes that they owe and it is illegal.

A small minority of tax evaders work in the ‘hidden economy’. Their income is not declared for tax purposes – working like this, perhaps for cash-in-hand, is referred to as the ‘hidden economy’. They may be unknown to HMRC, or registered as paying tax on some income, but have further hidden income sources.

HMRC’s research suggests that people’s attitudes and behaviours can be affected by any changes to their standard of living:

• people are finding new ways to boost household income and are more reluctant to declare it for tax
• customers are seeking good deals to save money, and businesses often feel they help customers by offering cheaper (tax-free) prices
• people who develop a money-spinning hobby are less likely to call it a business, or believe they are not earning enough to make it worth declaring

In a bid to change the behaviour of people tempted into the hidden economy, HMRC are:

• supporting new businesses with educational guidance and tools to help them pay the right tax, and working with colleges and e-trading sites to tailor tuition to people’s needs
• making it easier for people to pay the tax they owe; for example, through providing new online services and introducing a simpler income tax system for small businesses
• identifying those outside the tax system through matching details the department holds, such as using property data to detect undeclared rents from landlords
• helping people to come forward to voluntarily disclose income through campaigns, where the Revenue focus on targeting a specific type of work or occupation, while taking a tougher approach to businesses who refuse to do so
• using taskforces to target specific areas, such as location or sector, where people do not comply with tax rules. HMRC are expecting to recover more than £3 million through the efforts of their team sent recently to investigate the hidden economy in the second-hand motor trade in the Midlands. They are aiming for a further £3 million by probing hidden wealth in the same area – looking at people with offshore accounts and those living lifestyles beyond their obvious means, through income that they suspect is undeclared

Tax that is owed to HMRC but has not been paid makes up the tax gap. The Government is investing almost £1 billion to close the gap as non-compliance puts an extra burden on the “honest majority”, while making it harder for registered businesses to compete.

HMRC estimate the tax gap to be about £35 billion, with £5.4 billion or 15% due to the hidden economy.

In tackling this hidden menace HMRC:

• have more than 600 staff in their specialist hidden economy teams who identify those who should be paying more tax, working with wider compliance teams, aided by risk and intelligence experts
• investigated more than 19,300 people suspected of working in the hidden economy in the tax year 2012-2013; as a result they recovered more than £160 million in tax
• issued nearly 1,400 penalties in the tax year 2012-2013 for deliberate tax evasion in the hidden economy
• secured almost £2.5 million with help from the UK Border Agency from people exploiting illegal workers. HMRC now work with Border Force to tackle this issue

HMRC are also working with others to uncover the hidden economy such as the Department for Work and Pensions to identify benefit cheats.

Legislation introduced in September 2013 means HMRC can use data from credit and debit card companies on sales made by retailers, to cross check against their VAT registrations and business income declared on tax returns.

HMRC campaigns

Since 2007, HMRC campaigns have collected over £610 million in tax from people voluntarily coming forward, and over £395 million from a large number of follow-up activities.

Three other campaigns; Second Income, Credit Card Sales and Solicitors Tax Campaign, will have their tax takes disclosed during this tax year.