By Aaron Barbour
The National Audit Office has just published its report on: ‘HM Revenue & Customs: Tackling the hidden economy’. I sat on the advisory panel last year so was pleased to see the final version which landed on my desk last Thursday. It provides a wealth of information and critical examination about what HMRC has been doing recently to address informal economic activities.
The traditional approach taken by government departments, including HMRC, has been the use of deterrents or ‘sticks’, but this has not succeeded in eradicating informal economic activities and can drive businesses and people further into the hidden or shadow economy. The financial cost-benefit analysis in the NAO report illustrates this point, which we‘ve made in several publications on the informal economy.
HMRC achieved an overall return of around 4.5:1 on the £41 million a year it spent on all of its hidden economy work in 2006-07. Some of their approaches yield even higher returns. For example, positive and supportive advertising campaigns resulted in some 8,300 additional people registering to pay tax who may otherwise have joined or remained in the hidden economy. The Department estimates that they will pay tax of around £38 million over three years providing a return of 19:1 on the expenditure of £2 million. Building on this success, the Department could make more use of advertising to inform people of the benefits of working in the formal economy and make clearer what is likely to happen to them if they come forward voluntarily.
These NAO recommendations follow ones made in our latest report: ‘Self-employed and micro-entrepreneurs: Informal trading and the journey towards formalisation’, which examines the rationale for self-employed traders and their attitudes towards formalisation.
