1 The scale and nature of the hidden
economy
1. There are no reliable estimates of the tax lost
through the hidden economy. But it could be over £2 billion
and involve around 2 million people. The Department estimated
losses of between £400 million and £500 million in VAT
in 2001-02 from between 125,000 and 180,000 businesses that should
have been VAT registered but were not. For other taxes, the Department
has estimated losses of at least £1.5 billion involving 2
million ghosts and moonlighters. Ghosts are people who work in
the hidden economy and pay no tax on their earnings. Moonlighters
are people who pay tax on certain earnings but fail to declare
other additional sources of income. The Department has no estimate
of the number of employers who encourage or facilitate ghosts
and moonlighters and evade employers' National Insurance contributions.[2]
2. In 2006, the Department employed the University
of Bristol to produce firmer estimates of the amount of tax lost
from the hidden economy. The Department subsequently decided not
to take the work forward as the proposed methodology was unlikely
to produce worthwhile results because a significant number of
people would refuse to take part. The Department expects that
regular comparison of tax records against external information
sources will over time provide a better picture of the extent
of the hidden economy and trends within it.[3]
3. Other tax authorities have also tried to estimate
the amount of tax lost from the hidden economy, but so far none
has found a reliable method. A survey by the European Commission
in 2007 showed that across the 27 EU countries around 5% of people
had undertaken undeclared work in the previous year. The UK was
below the European Union average at 2%, and the results for each
country varied from 1% to 18%. The method used tends to under-report
the extent of undeclared work. The Commission is undertaking a
study to identify the best methodology for providing comparable
estimates of the amount of undeclared work across the EU.[4]
4. The Department believes that around 80% of those
operating in the hidden economy are individually evading relatively
small amounts of tax. It regards the self-employed as a high risk
area, especially those trades where cash is commonly used for
payment, such as building and decorating. New risks to tax revenue
are emerging from those trading on the internet and from buy-to-let
landlords failing to declare their income and capital gains. The
very nature of the hidden economy means that the Department lacks
a good understanding of the risks, and the scale of those risks
across all sectors of the economy.[5]
5. The Department has undertaken various special
projects on, for example, people holding offshore accounts who
do not pay tax on their income or interest, barristers, nail bars,
and medical consultants who undertake non-NHS work on which they
may not be paying tax. The Department has also sought to trace
the owners of luxury yachts and vehicles who may not be declaring
tax.[6]
6. When tackling the hidden economy, the Department
uses both preventive measures to encourage people into the formal
economy and other measures to detect, penalise and deter people
from operating in the hidden economy. Some projects contain features
of both approaches. Success depends upon maintaining a balanced
programme of prevention, detection and deterrence.[7]
7. In 2006-07, the Department spent £41 million
on its hidden economy work in 2006-07 and achieved an overall
return of 4.5:1. It spent around £22 million on detecting
and investigating cases, achieving a return of around £5
for every £1 spent, as well as creating a wider deterrent
effect. The Department has only recently launched advertising
campaigns and voluntary disclosure arrangements. Initial results
indicate that these measures are achieving substantially higher
returns than more traditional methods of detection.[8]
2 Qq 9, 45; C&AG's Report, paras 1.3, 1.5 Back
3
C&AG's Report, para 5.3 Back
4
C&AG's Report, paras 1.6 and 5.4; Underdeclared Work in
the European Union, September 2007, European Commission Back
5
Qq 59-61; C&AG's Report, para 5.2 Back
6
Qq 17-19, 52, 72, 76, 102-107; C&AG's Report, para 1.9 Back
7
C&AG's Report, paras 11-13 Back
8
C&AG's Report, paras 11-13, 3.2, 3.5, Figure 1 Back
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