On 26 August HMRC launched three new consultations containing proposals to tackle the hidden economy. Comments are invited from interested parties by 21 October 2016.

Hidden economy: extended power to collect data from money service businesses

HMRC proposes to extend its bulk data-gathering powers to include customer data held by money service businesses (MSBs). This data will help HMRC to identify non-compliant customers trading in the hidden economy.

MSBs are defined in the consultation document as entities providing money transmission, cheque cashing, or currency exchange services by way of business. Business models covered by this definition would include high street money transmitters and their agents; foreign exchange currency traders; and peer to peer money transmitters, including businesses that perform these functions in addition to their main line of business.

HMRC wants to extend its powers to gather data in bulk from these MSBs so they can better identify people who are trading but not declaring their income for tax purposes. One way to extend the powers would be to include these MSBs within the category of “relevant data holder” for the purposes of the relevant legislation.

HMRC clarifies that the new powers would not apply to credit institutions such as banks and building societies.

Tackling the hidden economy: conditionality

The consultation paper on conditionality proposes that access to some business services or licenses should be conditional upon businesses being registered for tax. The idea is to make it as difficult as possible for non-compliant businesses to function. Almost all require services from other businesses, and permissions and services from government, in order to trade. Introducing tax registration as a condition of access to some essential business services or licenses would make it more difficult for businesses to continue trading in the hidden economy.

The consultation does not propose firm policy measures, but seeks views on the principle of conditionality and how it could help to ensure tax compliance.

Tackling the hidden economy: sanctions

The consultation on sanctions looks at the potential for new penalties and sanctions to tackle people operating in the hidden economy, including those businesses that have already been penalized for non-compliance but have not changed their behavior.

HMRC considers that some non-compliant businesses see penalties for failure to notify HMRC as simply a cost of the business rather than a reason to change their non-compliant behavior. One option under consideration is to change the current “failure to notify” penalty regime so the penalty increases for a second failure to notify. There could be a simple escalation of penalties or a re-classification of a second failure to notify as deliberate.

Individuals and businesses in the hidden economy hide an item of income by not declaring it on the tax return. However the current penalties for inaccuracies in tax returns are not specific to the hidden economy. The consultation paper mentions possible approaches to deal specifically with attempts to hide income by omitting it from the return.

This could be done by defining a specific hidden economy inaccuracy, such as failure to declare an entire item of income, and change the penalties where this criterion applies. Alternatively the principle of escalation of penalties could be applied to penalties for inaccurate returns, so the penalties could increase for the second time the return is inaccurate. This could however be regarded as spreading the net too wide and having unintended consequences for taxpayers that are not part of the hidden economy.

The consultation also covers penalties for late returns from employers. Non-payment of PAYE and national insurance contributions adds to the tax gap and deliberate failure to notify HMRC of a PAYE liability could therefore be another aspect of hidden economy behavior. However an increase in penalties or introduction of a new penalty would need to be considered carefully so as to minimize the impact on employers who simply make mistakes on their PAYE returns.

The consultation paper also considers non-financial deterrents to hidden economy behavior such as increased monitoring of businesses and individuals engaging in hidden economy activity. Currently HMRC has a program for managing serious defaulters; a program for publishing the details of serious tax defaulters; and a serial avoiders’ regime under which HMRC can take action against persons persistently using tax avoidance schemes that are defeated by HMRC. An additional monitoring regime could be introduced involving enhanced monitoring of taxpayers with a history of hidden economy non-compliance.

Other possibilities suggested in the document include stronger penalties where illegal working is found alongside tax non-compliance.