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Depths of the Hidden Economy

By admin
01 Sep 2016
Manage Tax Risk

Tackling the hidden economy: In the excitement of the bank holiday weekend and with the uncharacteristic good weather forcing you into the great outdoors you may have missed the latest consultation announcement from HMRC.

These three consultations close on 21 October 2016 and invite views on the proposal and options for implementing new legislation aimed at targeting the minority of non-compliant customers who seek to exploit gaps in HMRC’s information gathering powers by:

  • Extension of data gathering powers to MSBs
  • Conditionality
  • Sanctions

The term Money Service Business (“MSB”) has a special meaning under the Money Laundering Regulations 2007, but is essentially any entity that provides money transmission, cheque cashing or currency exchange services.

The hidden economy consists of individuals and businesses who fail to declare a source of income or who fail to register for tax. In 2013/14 HMRC estimated that the hidden economy tax gap was £6.2bn (18% of total estimated gap in the UK).

Data Gathering

The proposal to extend HMRC’s bulk data-gathering powers to include customer data held by MSBs will help HMRC to identify non-compliant customers trading in the hidden economy. Where HMRC identify potential non-compliance, it would allow cases to be generated for further investigation or targeted compliance interventions.
Currently HMRC can request information from MSB’s for anti-money laundering purposes, but not for the purpose of checking the tax compliance position of its customers.

The proposed change to Part 2 of Schedule 23 to the Finance Act 2011 would extend the definition of “relevant data-holders” to include MSBs allowing them to obtain information on customer identity and the frequency, volume and value of transactions.

HMRC’s bulk data-gathering powers have evolved over the past five years since their simplification in 2011 and now include “merchant acquirers”, with draft legislation with Parliament to include “electronic stored-value payment services”.


HMRC is seeking to introduce ‘tax registration’ as a condition of access to some essential services (e.g. insurance, bank accounts and loans or merchant acquirer accounts) or licences (e.g. those issued by local authorities or government/professional bodies). It is thought that denying access will encourage businesses to make themselves known to HMRC so as not to impede their trading services.

The new legislation would either deny access to services/licences until a business’ tax registration is verified or allow them to be provided and collect the tax registration information from the issuer which would then be matched with other data to determine the registration status of the business.


There are currently a number of penalty regimes in place for failing to meet an obligation, submitting inaccurate information and late payment or filing. HMRC are proposing stronger sanctions for those who continue to fail to meet their obligations as a taxpayer. One option is to increase the existing “failure to notify” (Schedule 41) penalties for a second or third misdemeanour. Alternatively, with the understanding that following a non-deliberate first offence a taxpayer would be aware of their requirements, a subsequent failure would therefore be deliberate and therefore subject to existing ‘deliberate’ failure penalties. Exemptions for reasonable excuses would still apply although there is still no hard and fast list of what is considered ‘reasonable’.

HMRC believe that some businesses consider these penalties as a ‘cost of business’ and are therefore not a suitable deterrent to non-compliance. There are currently three non-financial deterrent programmes operated by HMRC: Managing Serious Defaulters, Publishing Deliberate Defaulters and Serial Avoiders Scheme. The current proposal is to extend the Managing Serious Defaulters programme (“MSD”) to include those businesses operating in the hidden economy who receive a ‘non-deliberate’ failure to notify penalty. It is hoped that this will deter continued non-compliance, while allowing further non-compliance to be identified sooner.

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