Hidden economy likely to come under scrutiny as taxman goes in search of lost revenue

Leading business and financial adviser Grant Thornton warns that businesses that are not registered to pay tax such as buy-to-let landlords and the self-employed will come under closer scrutiny as HM Revenue & Customs (HMRC) seeks to recoup dwindling tax receipts as the credit crunch bites.

A recent report published by the House of Commons' Public Accounts Committee found that white collar professionals are amongst the millions of workers estimated to be taking part in the hidden economy as the economic downturn takes its toll. It is estimated that over £2 billion a year in tax is lost through the hidden economy, according to research released by the National Audit Office (NAO) earlier this year.

The hidden economy is a term used to define anyone involved in undeclared economic activity. The term covers tax evasion of all kinds, ranging from casual moonlighting including those failing to declare additional sources of income to those paid cash-in-hand.

Gary Ashford, a tax investigations director at Grant Thornton, estimates that a clampdown will see a significant increase in well publicised court cases coming to light. He said: “Everyone working in professions where there is scope to be paid cash in hand or carry on second jobs should review their affairs and be proactive in declaring any discrepancies to the taxman.

“The current market downturn has undoubtedly affected businesses in one way or another but it is sensible for those in these risk professions to ensure that their tax affairs are in order. A brief look at how HMRC has challenged those with offshore assets makes it clear that it takes no prisoners and will almost certainly play hardball with anyone it finds to be operating in the hidden economy.”

Mr Ashford added: “Greater clarification needs to be given as to what happens if people come forward and volunteer information to the taxman. HMRC can charge penalties of up to 100% of the additional tax. However, there is the chance of mitigation for unprompted disclosures, in some cases eradicating the penalty. By publicising this it may encourage more people to put their affairs in order. Alternatively, the new HMRC approach on penalties  will be very harsh on those who deliberately evade tax and do not come forward to correct errors.  In those cases minimum penalties will be 50% if HMRC decides not to prosecute.

“Those operating within the hidden economy may be concerned that they may not be able to meet the set tax obligations, unaware that HMRC will allow time to pay.  Anyone who thinks they may have discrepancies in their affairs should act now, take advice and put together a full declaration.  This is the only realistic way to minimise the potential liability and reduce the risk of prosecution.”