HMRC have launched three consultations on ‘Tackling the hidden economy’ proposing tougher sanctions, conditionality and the extension of data-gathering powers.

The hidden economy includes businesses who fail to register for tax and individuals who fail to declare a source of income.  HMRC’s consultations, which were announced in Budget 2016, propose three different approaches to tackle these.

Tackling the hidden economy: Sanctions

Tougher sanctions are proposed for those who participate in a hidden economy activity:

  • Higher penalties for those who repeatedly fail to notify chargeability.
  • Additional tracking and enhanced monitoring of taxpayers with a history of hidden economy non-compliance, potentially through extending the Managing Serial Defaulters (MSD) regime.
  • Strengthening the penalty regime where an immigration offence is also committed.

The penalty changes would see a second failure to notify attract a higher penalty than the first failure.  This could be achieved by:

  • A simple escalation where penalties increase for second and third failures by the same individuals / businesses.  Unprompted non-deliberate failures could be exempt so as not to penalise innocent errors; or
  • Automatically classifying second and subsequent failures as deliberate failures,

The usual safe guards around reasonable excuse, review and appeal would continue to apply.

No changes are proposed to the penalty regimes for inaccuracies in returns or PAYE late filing penalties as these failings are not specific to the hidden economy.

Tackling the hidden economy: Conditionality

HMRC are considering the possibility of making access to licenses or services for businesses conditional upon on them being registered for tax.

Conditionality could apply to:

  • Public sector licenses, e.g. for private hire vehicles, trading, scrap metal, environmental health, planning or property letting.
  • Business services, e.g. insurance, bank accounts, rental or premises, loans, accounts with suppliers or utilities.

A grace period may be introduced where businesses wish to apply for licenses or services but have not yet started trading.

Tackling the hidden economy: Extending data gathering powers

It is proposed to extend HMRC’s existing bulk data gathering powers under Sch 23 Finance Act 2011 to cover Money Service Businesses (MSBs) such as:

  • High street money transmitters and their agents
  • Foreign exchange currency traders
  • Peer to peer money transmitters.
  • Cheque cashing services.

The data sought would include information on customers who use these services and their aggregate transactions.  This would allow HMRC to identify and take action against those who misuse cash services offered by MSBs to hide sources of income.

HMRC seek views on all of the above proposals as well as any alternative suggestions to tackle the hidden economy.

All three consultations will run until 21 October 2016 and will be followed by more detailed proposals. Legislation on extending data gathering powers may be included in Finance Bill 2017


Consultation documents:

Tackling the hidden economy: Sanctions

Tackling the hidden economy: Conditionality

Tackling the hidden economy: Extension of data-gathering powers to Money Service Businesses