If there was ever any doubt about HM Revenues & Customs’ determination to clamp down on companies and individuals who don’t fully comply with tax law, then those doubts have been removed by the publication of 3 consultation papers on the hidden economy, covering data gathering powers, the principle of making business support conditional on tax registration, and the extent of sanctions for non-compliance.
So what exactly is meant by the term ‘hidden economy’ and how much money does this sector cost the treasury? Well, the official definition of the hidden economy is defined in the consultation papers as “those businesses who fail to register for tax, and individuals who fail to declare a source of income that should be taxed.” In terms of tax shortfall from individuals and companies who act in this manner, HMRC estimates that the tax gap arising from the hidden economy was £6.2bn in 2013/14; a figure which accounts for 18 per cent of the total tax gap.
So how is HM Revenues & Customs planning to tackle this issue? Well, the main priority seems to be to try to prevent individuals and companies entering the hidden economy in the first place. Evidence shows that this approach seems to have the greatest impact when it comes to reducing the tax gap. However, HMRC also has a range of options available to deal with non-compliance should this preventative approach fail to work.
How is HMRC planning on identifying companies and individuals that operate in the hidden economy? Well, the government has signalled its intention to introduce legislation which will extend HMRC’s data gathering powers, thereby allowing it to obtain data from money service businesses (MSBs). The thinking behind this proposal is that it would significantly increase the amount of third party data available, and thus enhance HMRC’s ability to identify instances of non-compliance. What will this mean for MSBs? Well, the proposal certainly won’t place any additional burdens on MSBs to collect customer information; it will probably increase the administrative burden.
Although there are already a number of financial sanctions available for non-registration for tax purposes and non-compliance, HMRC is also consulting on how such penalties could be escalated. The suggestion is that any repeated failure to register for appropriate taxes may be seen as an indication to deliberately mislead, and may potentially attract higher penalties.
HMRC is also consulting on increasing the scope of non-financial deterrents. Under the Managing Serious Defaulters (MSD) scheme HMRC can monitor individuals and companies considered to be serious defaulters, and it can also publish their details under the Publishing Deliberate Defaulters scheme.
It was hoped this type of enhanced monitoring approach would have an impact on those companies who considered one-off financial penalties almost a price worth paying for the ability to operate outside formal processes. Judging from HMRC’s own figures, this approach seems to be starting to work; in 2015/16 HMRC’s targeted compliance teams settled 11,000 cases, generating a yield of £174 million – an increase of £28 million on the previous year.
The third consultation paper addresses the issue of conditionality; that is the principle of denying access to relevant licenses before a business’ tax registration is verified. While this would help deal with non-compliance, HMRC is mindful of the need to minimise the impact on compliant customers, and is looking to build a deeper understanding of how conditionality may affect different business sectors, including small businesses.
The consultation period for each paper closes on 31 October.