HMRC : tackling the hidden economy, fifty-fifth report of session 2007-08, report, together with formal minutes, oral and written evidence

Tax lost through the hidden economy could be over GBP 2 billion and involve some 2 million people.

HM Revenue & Customs (HMRC) spent GBP 41 million in 2006-07 on encouraging people and businesses into the formal economy, detecting and imposing sanctions on those operating in the hidden economy, achieving a return/cost ration of 4.5:1.

HMRC detects some 30,000 hidden economy cases a year, a detection rate of only around 1.5 per cent but the amount of tax recovered has increased by 13 per cent in real terms since 2003-04.

Areas of risk include: self-employed builders and decorators who often receive cash payments; individuals who trade on the internet; and, buy-to-let landlords.

To increase detections HMRC is making more use of data matching techniques and the Tax Evasion hotline received over 120,000 calls in 2006-07.

However progress in investigating cases has been slow with only 2,000 completed against a target of 5,500.

HMRC can impose penalties of up to 100 per cent of tax owed but usually imposes a lower penalty or waives them.

Prosecutions are not given much publicity, limiting their wider deterrent effect. Advertising campaigns to encourage people to declare tax owed have led to 8,300 registrations, bringing in extra tax of GBP 38 million over three years.

Offshore Disclosure arrangements have been even more successful following landmark rulings requiring financial institutions to release details of around 400,000 offshore accounts.

Some 45,000 people came forward bringing in around GBP 400 million at a cost of GBP 6 million, a return of GBP 67 for every GBP 1 spent.