HM Revenue and Customs is making little ground in its efforts to diminish the "cash-in-hand culture" operating in the United Kingdom, according to a new report by the House of Commons Public Accounts Committee.
"HMRC has no solid estimate of the level of losses but it might be over GBP2bn (USD2.96bn) a year," commented Edward Leigh, committee Chairman, on Tuesday. He continued:
"With a detection rate of only 1.5%, the chances of being caught are very slight. For those who are caught, the penalties imposed are usually relatively trifling: on average only 3% of the tax detected. And in very few cases, just two out of a thousand, is a prosecution launched."
"The Department has had some success at motivating people with offshore accounts to come clean and voluntarily to pay the tax they owe. It should devise similar schemes to persuade those in other risk areas - such as self-employed builders and buy-to-let landlords - to put their tax affairs in order."
"HMRC must also do much more to publicise both the benefits of joining the formal economy and the potentially serious consequences of not doing so. And if such publicity is to have any effect, then it must be backed up by resolute action by the Department to complete more investigations, apply the full range of new penalties available and ramp up the number of prosecutions."
Leigh was speaking as the committee published its report on the scale and nature of the hidden economy, encouraging people into the formal economy, detecting people in the hidden economy, and the use of penalties and criminal investigations.
It is thought that around 2 million people operate in the informal economy, although there are no reliable estimates of the tax lost as a result. HMRC spent GBP41m in 2006-07 on encouraging people and businesses into the formal economy, and detecting and imposing sanctions on those operating in the hidden economy. The department achieved a return/cost ratio of 4.5:1 which is expected to increase as recent initiatives achieve their full effect.
Areas of risk identified in the report include: self-employed people, such as builders and decorators, who often receive cash payments; individuals who trade on the internet; and buy-to-let landlords.
Since 2003-04 HMRC has detected some 30,000 hidden economy cases a year, a detection rate of only around 1.5%. The amount of tax from cases detected in the hidden economy has, however, increased by 13% in real terms since 2003-04. The return on the Department's investigations in 2006-07 was 5:1.
To increase detections, the department has been making more use of data matching techniques. It also set up the Tax Evasion hotline in 2005 for members of the public to report suspicions of tax evasion. The hotline received over 120,000 calls in 2006-07 but progress in investigating cases has been slower than the department expected.
HMRC completed 2,000 investigations compared with 5,500 planned, yielding additional tax assessments of GBP2.6m compared with GBP32.5m planned. Investigations of small businesses, businesses which should be registered for VAT but are not, and employers' compliance yield higher returns.
When the HMRC detects people in the hidden economy, it can impose a penalty of up to 100% of the tax owed. In most cases it either imposes a much lower penalty or waives the penalty. In 2006-07 the department imposed penalties of GBP5m, amounting to around 3% of the tax identified. Prosecutions rose to 69 cases in 2006-07.
To encourage people to declare tax owed, the department has run advertising campaigns, which have led to a further 8,300 registrations and should result in additional tax of GBP38m over three years. In 2007, HMRC introduced the Offshore Disclosure arrangements to encourage people holding overseas bank accounts to voluntarily disclose and pay any tax owed. This followed landmark rulings against several major financial institutions which required them to disclose details of around 400,000 bank accounts. Some 45,000 people came forward bringing in around GBP400m at a cost of GBP6m, a return of GBP67 for every GBP1 spent.
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