The Hidden Economy Goes Even Deeper

Tax dodgers trading in the so-called “hidden economy” should be aware of proposals by HMRC to clamp down on their non-compliant activities.

That’s the warning from Bristol-based experts Edge Tax regarding plans, currently under public consultation, to further extend HMRC’s power of investigations and data collection.

The “hidden economy” consists of individuals and businesses who fail to declare a source of income or who fail to register for tax. In 2013/14 HMRC estimated that the hidden economy tax gap was £6.2bn, or 18 per cent of the total estimated gap in the UK.

The latest target is data held nationwide by Money Service Businesses (MSBs), which are essentially any entities which provide money transmission, cheque cashing or currency exchange services. Currently HMRC can request information from MSB’s for anti-money laundering purposes, but not for the purpose of checking the tax compliance position of its customers.

The new proposals are to extend HMRC’s bulk data-gathering powers to include customer data held by MSBs, in order to help HMRC to identify and then investigate non-compliant customers trading in this hidden economy.

Anton Lane is a Chartered Tax Adviser who is Managing Partner at Edge Tax, based in Hambrook near Bristol.

He said:

“Business owners and individuals who are using these methods to avoid registering for tax or failing to declare income should be warned – HMRC’s ability to acquire and analyse data to identify and pursue those who are non-compliant is growing all the time. The consultation process is something of a formality and I can see no reason why these proposals will not go through Parliament and become law relatively quickly. There is a huge tax gap as a result of the hidden economy and with strong political motivation behind closing it up, those who are on the wrong side of the line of compliance should think seriously about how to manage their affairs going forward.”

In a bid to further encourage businesses to make themselves known, HMRC is also seeking to introduce ‘tax registration’ as a condition of access to some essential services such as insurance, bank accounts and loans, or licences like those issued by local authorities or government and professional bodies.

Mr Lane said:

“Being denied access to these services and licenses could impede businesses’ ability to trade. The proposed measures regarding this conditional access will also provide HRMC with another source of tax registration information which it can then use in its investigations.”

And the proposals also include suggestions for stronger sanctions against those who continue to fail to meet their obligations as a taxpayer. One option is to increase the existing “failure to notify” penalties for a second or third misdemeanour. Alternatively, with the understanding that following a non-deliberate first offence a taxpayer would be aware of their requirements, a subsequent failure would therefore be deliberate and therefore subject to existing ‘deliberate’ failure penalties.

Mr Lane said:

“HMRC believe that some businesses consider these penalties a ‘cost of business’ and are therefore not a suitable deterrent to non-compliance. The proposal is to extend the Managing Serious Defaulters deterrent programme to include those businesses operating in the hidden economy who receive a ‘non-deliberate’ failure to notify penalty. It is hoped that this will deter continued non-compliance, while allowing further non-compliance to be identified sooner.”

To download the HMRC consultation document regarding the hidden economy, click here.

Businesses have until Friday October 21st to respond to the consultation, either by emailing isbc.compliancepolicy@hmrc.gsi.gov.uk or in writing to HM Revenue and Customs, Alex Barrow, Alex Wakefield and Sarah Harris, G/73, 100 Parliament Street, London, SW1A 2BQ.

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