House of Commons - Public Accounts

Select Committee on Public Accounts Fifty-Fifth Report

3 Detecting people in the hidden economy

12. Since 2003-04, the Department's hidden economy teams have detected some 30,000 cases a year. This represents a detection rate of around 1.5%, based on the 2 million people estimated to be in the hidden economy. The Department recognised that the number of detections needs to increase. It plans to redeploy some investigation staff to hidden economy work, having put considerable effort and achieved some success in reducing VAT missing trader fraud in recent years.[14]

13. Over the four year period to 2006-07, the amount of tax the Department detected in its hidden economy investigation work increased by 13% in real terms to £145 million. The Department's return on detecting and investigating hidden economy cases in 2006-07 was £5 for every £1 invested. It achieves highest returns of 15:1 on investigating businesses which should be registered for VAT but are not.[15]

14. In 2004, our predecessors recommended that the then Inland Revenue expand the remit of its anti-fraud hotline—which covered employers and PAYE—and publicise its existence.[16] In November 2005, the Department set up a confidential Tax Evasion hotline allowing members of the public to report suspicions of evasion on income tax, corporation tax, capital gains tax, inheritance tax, VAT and National Insurance contributions. People can also report suspicions through the Department's website by completing an online form.[17]

15. Between February and April 2006, the Department advertised the hotline extensively to encourage members of the public to report their suspicions of self employed people operating in the hidden economy, such as hairdressers and taxi drivers. The Department launched a more limited radio campaign in February 2007 targeted at employers who do not pay over the tax they deduct from employees on their payroll. In total, the Department spent £4.5 million on advertising the hotline.[18]

16. In 2006-07, the Tax Evasion hotline received around 120,000 calls from the public. The Department completed around 2,000 investigations compared with 5,500 planned. The Department had to spend additional effort on handling three times more calls than expected and evaluating the information received. Around half the calls lack relevant information or, following risk assessment, are found not to merit further action. By the end of March 2007, the Department had completed investigations on almost 2,000 of the 19,800 cases on which it had produced intelligence packages, and had a further 1,500 investigations underway. 11,900 cases awaited investigation (Figure 1). The Department continues to receive around 7,000 calls a month.[19]

Figure 1: Progress as at 31 March 2007 on Hotline calls received during 2006-07

17. The Department assessed that £2.6 million of tax was due from completed hotline cases in 2006-07 against an estimate of £32.5 million. The lower number and different mix of cases investigated caused this shortfall. Most of the information received by the Department has been on ghosts and moonlighters where the tax at stake is lower than for cases involving small businesses and employers. This may be because the Department's advertising of the hotline concentrated mainly on self-employed people operating in the hidden economy rather than employers.[20]

18. The average amount of tax achieved per case has been higher than estimated. For example, the average amount of tax achieved on employers' cases was over £23,000 compared with the £10,500 estimated. The Department intends to undertake more employer compliance reviews as it has only completed an insignificant number; 14 cases compared to the 2,600 expected (Figure 2). The continued slow progress in dealing with hotline cases means that the additional tax in 2007-08 fell well below its original estimate of £77 million.[21]Figure 2: Hotline cases completed in 2006-07

Estimated Numbers of cases Cases Achieved Estimated average amount of tax Average achieved Estimated tax assessed

£million Total tax achieved

£ million

Registration of ghosts and moonlighters 2,100 1,823 £790 £890 1.7 1.6

Employer compliance reviews 2,600 14 £10,540 £23,170 27.2 0.3

Small business investigations 800 146 £4,630 £4,730^. 3.6 0.7

All cases 5,500 1,983 £5,940 (weighted average) £1,330 (weighted average) 32.5 2.6

Source: C&AG's Report, HM Revenue & Customs: Tackling the Hidden Economy (HC 341, Session 2007-08)

19. The Department has been making more use of data matching to detect people in the hidden economy by linking the various data it holds on taxpayers and comparing it with third party information such as Yellow Pages. It is some way behind the Department for Work and Pensions which carries out regular bulk data matching exercises to detect errors and fraud in benefits. In a pilot project, the Department is using specialist computer software to analyse various internal and external information sources. This work has identified over 300,000 cases of suspected ghosts and moonlighters. The Department plans to conduct further work in 2008-09 on up to 20,000 cases, with potential tax of £26 million. This work is experimental and at an early stage of development. The Department could make more extensive use of information available on, for example, those paying business rates on their premises, and local authority licences for doormen, street traders and taxis. It could also make more use of vehicle licensing data held by the Driver and Vehicle Licensing Authority, such as by identifying owners of high value cars and commercial vehicles who may not be declaring their income.[22]

20. Under the Money Laundering Regulations, organisations are required to make suspicious activity reports to the Serious Organised Crime Agency if they know or suspect that a transaction involves money laundering. In 2004, the Department received additional Spend to Raise funding to use these reports to increase the number of people it detects who may have a source of income they are not declaring.[23]

21. From April 2004 to March 2007, the Department completed 7,150 investigations involving over £27 million in tax, compared with £74 million expected. The Department had expected to generate significant numbers of cases from information obtained from solicitors and accountants. A court ruling in 2006 confirmed, however, that solicitors and accountants can only disclose client information in limited circumstances. As a result, the Department has been able to obtain far less information than originally expected. It has not considered whether it should seek new powers as a consequence.[24]

22. The Department's hidden economy teams also receive referrals from the National Minimum Wage team which investigates whether employers are complying with the legislation. Of its 4,200 investigations in 2006-07, the National Minimum Wage team referred 580 cases where it suspected employers may be paying employees' cash in hand. The Department accepted that it should provide feedback to the national minimum wage team on what has happened on these cases and whether the information was useful.[25]

14 Qq 10-11, 15-16, 114; C&AG's Report, paras 1.5, 3.2. VAT missing trader fraud is where fraudsters register for VAT, buy goods VAT free from another EU Member State, sell them on at VAT inclusive prices and then disappear without paying the VAT due. Back

15 Qq 11, 47-49; C&AG's Report, paras 3.4, 3.5 Back

16 Committee of Public Accounts, Tackling Fraud against the Inland Revenue Back



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