Tax lost through the hidden economy

Here we go again. The House of Commons Public Accounts Committee (PAC) has published a new report today: HMRC: Tackling the hidden economy in which they state very clearly that:

There are no reliable estimates of the tax lost through the hidden economy

They add:

but it could be over £2 billion a year and involve around 2 million people.

So of course that's the figure that has been reported by all of the press. It is also used as a comparative for the number of 30,000 hidden economy cases that have been uncovered each a year since 2003–04. This leads to the suggestion that there is a detection rate of only around 1.5%. Whatever the truth of the numbers there is a long way to go and this PAC report sets out some very sensible actions that need to be taken. I don't agree with them all but that's not the point.

It was only last April that the National Audit Office published a not dissimilar report: HM Revenue & Customs: Tackling the hidden economy.

I'm sure the MPs on the PAC have done their best but it seems to me that the £2bn figure they have quoted above has been lifted from this report but not updated for inflation. The NAO stated that:

In common with other tax authorities, HM Revenue & Customs has sought to estimate the amount of tax lost from the hidden economy, but so far no one has been able to produce robust estimates. In 2002 the Department published estimates of VAT losses of between £400 million and £500 million from between 125,000 and 180,000 businesses that should have been VAT registered but were not. Since that time the Department has continued to work on ways of estimating the amount of tax lost. For other taxes, the Department estimated in 2005 that using certain assumptions there were some two million ghosts and moonlighters with losses of at least £1.5 billion

Of course there needs to be a starting point and £2bn is a good a figure as any other to suggest the scale of the problem is enormous.

Back in 2000 Lord Grabiner reported on the Informal Economy. That report suggested that every year billions of pounds have been lost to the informal economy. And that 120,000 are working while 'signing on' at a cost of nearly half a billion pounds to the taxpayer.

All such estimates are intended to be used to highlight how cost effective it SHOULD be to deploy more HMRC tax investigators to root out those who are not paying their fair share of tax (to use one of the Government's favoured phrases).

Instead of increasing the number of well trained staff that HMRC have available to investigate, challenge (and if necessary prosecute) those who choose not to fully declare their taxes, the Government continues to cut their staffing. The emphasis seems to be only on providing incentives to come clean. But these are rarely thought through and have only limited impact.

Until Mr and Mrs Average see and hear regular stories of how cheaters are being caught out and made to pay, all the hot air in the world will simply evaporate to limited effect. In this regard I am simply echoing a recommendation from the PAC report:

For every thousand cases detected only two are prosecuted. The Department achieves limited publicity on prosecutions reducing the deterrent effect.

The NAO report was a step in the right direction. The PAC report builds on this and, if its key recommendations are implemented they will herald a brave new world - and plenty of work for tax investigation specialists. Bring it on!