Tackling Tax Evasion & the Hidden Economy – Upcoming Changes

09 November 2020

The hidden economy consists of individuals and businesses with sources of taxable income that are entirely obscured from HMRC – they do not declare their income on tax returns. Some of these businesses usually ask customers to pay in cash, so it is harder for HMRC to identify their existence, investigate and quantify their earnings and tax liabilities. 

In 2018/19 the hidden economy tax gap, the difference between the amount of tax expected and that actually paid, is estimated to be £2.6 billion. With COVID-19 placing extra strain on our economy, resulting in increased Government spending, it comes as no surprise that the Government intends to clamp down further so on such tax evasion. 

What are the proposed changes and what does this mean for taxpayers?

Draft legislation published by HMRC will introduce a check on tax registration, known as ‘conditionality’. This means that, from 4 April 2022, when some types of businesses seek to renew a licence to trade, they can only obtain the licence if they are able to demonstrate that they are registered for tax. This change is focussed at businesses which typically accept cash payments, with the intention of helping them understand their tax obligations and therefore increasing compliance with the annual tax return and payment process. Those affected are: 

  • Taxi and private hire vehicle (PHV) drivers (for example, minicabs drivers) 
  • PHV businesses 
  • Scrap mental dealers on a site 
  • Mobile collectors of scrap metal. 

Under the new rules, licencing bodies will be required to signpost first-time applicants to HMRC guidance about their potential tax obligations from 4 April 2022. The applicant will need to confirm to the licensing body that they are aware of the HMRC guidance before their application can be considered. If the individual or business does not register to file returns and pay tax thereafter then HMRC may consider imposing significant tax-geared penalties on the basis that they were aware of their obligations as a result of this process. 

When the applicant is renewing their licence the licencing body must, before considering the application, obtain confirmation from HMRC that the applicant has completed a tax check. This means that an applicant will have to provide information to HMRC to enable HMRC to satisfy itself that the applicant has complied with an obligation to notify their chargeability to tax. The check will be completed when HMRC is satisfied the applicant provided all information requested. If the check is not completed satisfactorily then the person’s application to renew their licence will fail & their licence will lapse.  It will be important for those applying to renew their licences to start the tax check process early enough so that their licence does not lapse.

If anybody affected by the new rules needs to bring their tax affairs up to date then they should consider doing so now, before the rules are enacted in the next Finance Bill.