The tax-free 'shadow economy' uncovered

A new report suggests that £1 in every £10 spent in the 2011/12 tax year was undeclared to HM Revenue and Customs (HMRC), resulting in a ‘shadow economy’ of £100bn worth of undeclared UK trade.
 
The report from Richard Murphy, published jointly by Tax Research UK, Tax Justice Network and the Association for Accountancy and Business Affairs, suggests that based on missing VAT data published by HMRC and the European Union (EU), the cost of this adds up to £40bn which was lost to the UK Exchequer.
 
This figure would have been enough money to pay for budgets in the housing, environment and transport sectors combined, or provide half of the UK’s education budget.
 
Based on projections from the Treasury and Office for Budget Responsibility, these losses are likely to have increased to £47bn by 2014/15.
 
The most significant component of the current tax gap is tax evasion. The most common form of tax evasion comes when people don’t declare their trading income. Other forms of tax evasion include not declaring income from investments, expenses claims that are not allowable and hiding income offshore.
 
Another factor behind the tax gap is the annual figure of 300,000 companies that are struck off the Register of Companies, and very few of these submit the accounts due to be filed before they are struck off. The number of investigations into these firms appears low, with outstanding taxable revenue almost certain to be out there.
 
Richard Murphy believes HMRC is not accurately producing data on the actual size of the tax gap, and says that Government cuts to staffing at HMRC and Companies House have “severely reduced” their capacity to track companies trading in the UK and collect tax from them.
 
The report argues that HMRC needs more resources to be able to locate and tax the vast sums of money that is currently going undeclared. Its staffing level has dropped by almost 50 per cent, with more job losses to come. Instead, as well as more staff, HMRC should be given extra enforcement powers.

Date published 5 Jun 2014 | Last updated 5 Jun 2014