On 13 March 2018 the government issued a call for evidence entitled “Cash and digital payments in the new economy”.

HMRC notes that the use of cash can present problems with tax compliance because people dealing in cash may have problems keeping accurate records and in some cases people may hide or disguise their income by under-reporting in the tax return (or by not reporting the income at all). The information on the tax gap in the UK shows a number of non-compliant behaviours including failure to take reasonable care by not keeping accurate records or failure to report a taxable source of income.

Another problem linked to the use of cash is money laundering. Cash based money laundering is one of the most prevalent money laundering behaviours impacting the UK. The current increase in digital payments and reduction in cash use will only have a limited impact on this because money launderers will continue to find ways of pursuing their objectives including the continued use of cash based businesses.

The tax system is already adapting for the increase in digital payments and the reduction in the use of cash. The UK government is considering how corporate tax rules can be adapted to the digital age; exploring how to best use new technology to combat fraud; and looking at how platforms offering new opportunities to earn income can also help taxpayers to understand and comply with their tax and other obligations.

The government is encouraging taxpayers to present accurate returns through the Making Tax Digital programme. Digital records, use of software to reduce errors and regular updates will ensure more accurate record keeping. Businesses introducing new accounting systems to comply with Making Tax Digital may benefit from integrating their wider business models into the digital systems and this may also drive a preference for making and receiving payments digitally.

HMRC’s data gathering powers have been extended to cover Money Service Businesses proving money exchange, cheque cashing and currency exchange services. This will enable HMRC to better identify funds arising from undeclared taxable income.

HMRC already supervises High Value Dealers (HVDs), defined as businesses that make or accept cash payments of GBP 10,000 or more or the equivalent. Around 650 businesses are currently supervised as HVDs. The government is now exploring further measures to reduce risks from tax evasion, the hidden economy and money laundering arising from the cash economy. The consultation paper is inviting Information on situations where people legitimately use large amounts of cash for transactions and what are the barriers to performing such transactions digitally.

The National Risk Assessment issued in October 2017 considered that cash based money laundering continued to pose high risks for the UK economy. There has been an increase in the movement of cash through the non-bank financial system including activities of cash smugglers. The previous National Risk Assessment from 2015 suggested that cash intensive businesses such as scrap metal wholesalers, nail bars, takeaways and storage warehouses offered opportunities for money laundering.

The UK government is therefore asking for information on the sectors or circumstances where cash usage could increase risks of tax evasion or money laundering. The government is also looking at how it can use insights into behaviour to develop “nudge” techniques to combat cash related tax evasion and money laundering.