Tackling the hidden economy - the next big thing?

06 September 2016

Andrew Hinsley

With all the recent focus on measures to combat tax avoidance and offshore evasion, it’s easy to overlook those that take a more basic approach of not paying their taxes by either failing to register with HMRC (‘ghosts’) or declaring only part of their activities (‘moonlighters’). Together these make up the hidden economy. 

On 26 August 2016, HMRC published three consultation papers on tackling the hidden economy. HMRC is adopting a similar approach to that that taken in relation to tax avoidance by seeking to significantly increase the downside for persistent offenders. Suggested measures include higher penalties for repeated failures; making access to licences or services for business conditional on them being registered for tax; and extending HMRC’s bulk data-gathering powers to money service businesses.

The proposed measures are broadly targeted at those in the hidden economy. Given the hidden economy is the biggest single contributor to the tax gap the key target must be identifying those that fail to register in the first place so perhaps the more significant question is whether there is enough focus on this area of non-compliance.  

According to HMRC’s consultation documents the hidden economy represents 18 per cent of the overall £34bn tax gap, but it receives much less publicity than tax avoidance, which is rarely out of the news and by comparison represents only 8 per cent. Whilst £6.2bn attributable to the hidden economy is headline-grabbing, it is generally less newsworthy than tax avoidance because typically it doesn’t involve high profile companies, celebrities or occasionally even politicians. 

Whilst the yield in individual hidden economy cases is typically (though not always) much lower than in individual tax avoidance cases, if HMRC’s figures are to be believed, a lot of small cases add up to a very big number.

HMRC states that experience indicates that the greatest impact on the hidden economy tax gap stems from prevention; initiatives here include guidance and tools for new businesses and working with schools about the importance of paying tax. Whilst these may be useful, should there be more HMRC resource (perhaps diverted from compliant companies if resource is an issue) and wider publicity devoted to those that deliberately fail to join the tax club?

In the 80’s, Del Boy’s signature tune for Only Fools and Horses bragged about no income tax, no VAT but he remained something of a national treasure, so attitudes may be harder to challenge than tax avoidance. However, given the hidden economy represents a bigger overall compliance prize for HMRC than tax avoidance, perhaps now is the time for some rebalancing of the tax gap messaging.