Conclusions and recommendations
1. In common with other tax authorities, the
Department does not have robust estimates of the tax lost from
the hidden economy.
A firmer estimate would help the Department judge the scale of
the problem posed by the hidden economy and whether it is doing
enough to tackle it. Given the difficulties in developing such
estimates, it is important to capitalise on the work of others
in this area. The Department should work closely with the European
Commission in its project on undeclared work to develop an estimate
for the UK.
2. The Department has not fully assessed the
risks to tax from different sectors and groups in the hidden economy.
It should bring together information it currently holds in a structured
way to identify the highest risks and gaps in coverage where further
analysis is needed.
3. Through its Offshore Disclosure arrangements,
the Department has succeeded in persuading 45,000 people to put
their tax affairs in order, thereby raising £400 million
in additional tax at a cost of £6 million.
The Department should devise similar schemes in other risk areas
such as the home repair and improvement sector and buy-to-let
landlords. Such schemes would involve obtaining information on
groups of potentially non-compliant people or businesses through
data matching and other sources, and using that information to
secure voluntary disclosure.
4. Around 80% of those operating in the hidden
economy are likely to owe relatively small amounts of tax, but
the total tax at stake could be significant.
Methods which encourage groups of people to put their tax affairs
in order, such as publicity campaigns and voluntary disclosure
schemes have proved more cost-effective than formal investigation
of individual cases. The Department should further publicise the
benefits of joining the formal economy and how to do this. It
should also use publicity campaigns should to encourage take up
of further voluntary disclosure schemes.
5. The Department has detected some 30,000
hidden economy cases a year since 2003-04, a detection rate of
around 1.5%, so the chances of getting caught appear minimal.
The Department could boost the detection rate by following the
example of the Department for Work and Pensions and make more
use of data matching techniques. Comparing tax records with information
on businesses that pay business rates and on local authority licences
for doormen, street traders and taxis could help identify those
evading tax.
6. The Department has a large and growing
backlog of Tax Evasion hotline cases awaiting investigation. It
has not reached its target for completed investigations and it
is not keeping pace with the caseload generated.
The Department should speed up the investigation of hotline cases
by redeploying resources that are no longer required on investigating
VAT missing trader fraud and suspicious activity reports. The
Department should complete the 11,900 cases awaiting investigation
and aim to complete a similar number of investigations each year.
7. The Department makes higher returns on
certain types of investigation, such as small businesses, businesses
not registered for VAT, and employer
compliance reviews. Hotline investigations have also generated
much higher returns than initially expected on such cases. The
Department should concentrate more detection work in these areas.
It should also increase the number of such cases reported to the
hotline by focusing further advertising campaigns on these areas
of risk.
8. The Department has raised £27 million
from investigating suspicious activity reports but expected to
raise £74 million. It expected to
use the suspicious activity reports made to the Serious Organised
Crime Agency under the Money Laundering regulations, to detect
significant numbers of people with undeclared income. A court
ruling in 2006 has restricted the information it can obtain in
this way from solicitors and accountants. The Department should
consider whether to seek alternative powers to strengthen this
work.
9. The Department can impose penalties of
up to 100% of the tax detected but usually does not do so. The
average penalty is only 3%. When the new
penalty regime comes into force, the Department should use the
full range of penalties available, and track the number and value
of penalties levied compared to the tax involved. It should also
rigorously apply the penalty rules for those it detects who failed
to come forward voluntarily under the Offshore Disclosure arrangements.
10. In 2006-07, the Department
abandoned 284 criminal investigations, roughly the same as
the number it opened that year. Over a third of cases have
been under investigation for more than one year. Reducing
the number of abandoned investigations and meeting its target
for completing its investigations within a year would release
resources that could be used to increase levels of other activities,
such as prosecutions. The Department should improve its selection
of cases by identifying the factors that lead to cases being abandoned.
The Department should also manage more closely the progress of
cases against its one year target and interim milestones.
11. For every thousand cases detected only
two are prosecuted. The Department achieves limited publicity
on prosecutions reducing the deterrent effect.
In comparison the Department for Work and Pensions secures 60
prosecutions per thousand benefit fraud cases. The Department
should double the number of prosecutions. It should also raise
public awareness about the risk of detection and punishment by
advertising the results of its work through, for example, its
website and contacts with trade and professional organisations.
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