Govt to crack down on “hidden economy”

Monday 27 July 2015

Her Majesty’s Revenue and Customs (HMRC) have launched a consultation that it says is aimed at tackling the so-called “hidden economy”, and collecting more of the tax revenue to which it is entitled.

This refers to businesses or individuals who fail to register their enterprise or declare their income, thus avoiding tax. It is believed to cost the government about £5.9 billion every year, accounting for 17 per cent of the total tax gap between what HMRC is owed and what is actually collected.

While employers fulfil the relevant responsibilities for their workers, contractors, freelancers and sole traders can accidentally fall foul of the rules, particularly in the early stages of setting up a business.

Luckily, it’s easy to avoid this by registering with HMRC, and making sure you declare your income properly. The organisation says it also aims to “Promote good compliance, making it easier for people to get it right”, meaning that freelancers who want to follow the rules are able to do so.

The main target of the new proposals are those who deliberately avoid paying their tax and business rates, so it is likely that law-abiding contractors will be largely unaffected by the changes if they are accepted.

However, HMRC suggests that the new powers could even signal an end to the tedium of form-filling when it comes to remaining tax compliant. It said its eventual aim was to “present its customers with data to check rather than forms and tax returns to complete”, as well as shifting the majority of the burden from contractors and other small business owners.

To ensure that as many offenders as possible are caught, HMRC wants to extend its data collection powers. Under the new proposals, it will be able to gather data from third parties to detect evasion. These include online payment services like PayPal, as well as digital markets such as app stores, together with online booking and marketing services.

HMRC already has data investigation powers that were previously extended under the 2013 Finance Act, but newer forms of e-commerce such as those previously mentioned are not currently included in the current provisions.

These intermediaries are expected to be particularly effective in reporting the true value of sales realised through them, which could provide a useful check to ensure that businesses are not under-declaring their revenue. It is believed that the services are currently enabling less ethical small business owners to slip under the tax radar.

As part of the consultation documents, HMRC wrote: “Data can be particularly powerful when it is collected from third parties who facilitate trade, either between businesses, or between businesses and consumers. This is because they can provide information in bulk about the activity of large numbers of traders, and because third party data can be used as an independent check against the data that taxpayers themselves report to HMRC (third party data is less likely to be subject to accidental misuse or deliberate manipulation).”

The proposals are currently open to a public consultation, which will run until October 14th.


By Victoria McDonnell

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