HMRC will tackle the tax gap created in the hidden economy. This consists of businesses who fail to register for tax, and individuals who fail to declare a source of income. HMRC estimates that the tax gap in 2012/13 due to the hidden economy stood at £5.9bn, which equates to 17% of the total tax gap. The tax gap is the difference between the receipts HMRC actually collects and the amount of tax that should be collected if all taxpayers complied with the letter and spirit of the law.
HMRC’s aim is to achieve a significant and sustained narrowing of the hidden economy tax gap. To achieve this, HMRC must make compliance the easy option for customers. HMRC’s compliance strategy is based on three principles:
- Promote good compliance, making it easier for people to get it right
- Prevent non-compliance, preventing mistakes and stopping things from going wrong
- Respond to non-compliance, targeting our approach to tackling complex cases and deliberate cheats.
HMRC is now engaging in a consultation until October 2015 about its hidden economy strategy. Any new legislation is likely to be put in place early in 2016.
Effective tackling of the hidden economy will ensure a level playing field between those businesses and individuals who comply with their tax obligations and those that do not. In the hidden economy context, this means working to improve the processes by which our customers register for tax and report their income to HMRC, helping them to get things right first time. HMRC will also make the hidden economy an increasingly difficult place to enter and in which to operate, and robustly tackle those who continue not to pay the right amount of tax.
Data about taxable activity plays a key role in enabling HMRC to detect those operating in the hidden economy, and to target resources to tackle them more efficiently. 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).
Targeted data-gathering powers also minimise the burden on business, obtaining data in bulk from a few sources rather than imposing broad-based reporting requirements. Third party data also plays an important part in HMRC’s ambition, where possible, to present its customers with data to check rather than forms and tax returns to complete. Pre-filling or pre-populating information in this way will help to reduce error and improve overall compliance.
In 2013 (Finance Act 2013 section 228), HMRC obtained new powers to collect data from merchant acquirers – businesses that process credit and debit card transactions. This data helps HMRC identify traders that are receiving income but are not registered for tax, as well as those who are registered but under-declare their income to HMRC.
The government has now announced its intention to legislate to extend access to two similar sorts of data to help tackle the hidden economy. These changes will apply to data held by:
- Electronic payment providers – businesses that perform a similar function to merchant acquirers by handling monetary transactions, but not necessarily in relation to credit and debit cards (increasingly these transactions are online and take different digital forms)
- Business intermediaries – these businesses can take many forms, for example allowing customers to make orders, purchases or reservations relating to goods, services or digital content. Again, these businesses increasingly operate on digital platforms.