An oft-referenced part of UK society, the hidden economy refers to businesses that either don’t pay tax, or under-report their tax.
While many that fall into this category don’t realise their mistake, there are indeed others that intentionally and deceptively work to disguise taxable income.
In August, HMRC released a series of consultations revealing increased power and search capabilities in uncovering businesses that are operating in the hidden economy.
These tactics will include a multi-pronged approach from search to tightening advisory requirements in order to find the unregistered in the crowd.
Searching for the hidden economy
Since 2011, HMRC has been using a search tactic called CONNECT, which uses a mathematical analysis to link companies or self-assessments with payments to third parties such as transactions related to property, loans, bank accounts, and more.
There are three new consultations that outline a more regulated, clear set of guidelines for determining whether a business is paying their dues.
New sanctions will be introduced that will allow more severe penalties, especially for those who have previously received a penalty and still have not changed their actions.
Current penalties are applicable when: an individual fails to meet obligations such as complying with the general regulations, providing inaccurate documents and/or returns, late payment.
The new extensions proposed include several provisions covering those who fail to notify, as well as increased monitoring of individuals or businesses that have previously paid penalties.
The data-gathering abilities of HMRC are mainly being extended by the inclusion of money-service businesses. Essentially, this means any businesses that handle in transactions, from high street stores to foreign currency exchange.
Essentially, any party that processes credit or debit card transactions.
The final consultation involves limiting the availability of services or licences to businesses if they are not able to provide proof of tax registration.
This is in an attempt to normalise tax registration and make it more challenging for individuals and businesses still working in the hidden economy.
Who this affects
Aside from those who are aware they are operating in the hidden economy, there may be many who are just unsure of whether their side project, hobby, or new endeavour requires them to register for tax.
In his free time, Tom builds tables and chairs from scrap wood. When he started, he kept them for himself or gave them as gifts to friends and family members.
Soon, word spread and he occasionally made a table or chairs that he sold for a small price, just enough to cover the cost of materials. Usually, there wasn’t a profit, but if there was ever a little extra, he added it to his holiday savings.
Tom’s friend suggests he puts a couple of his extra pieces up on Ebay. Each piece sells for much more than Tom expected, giving him a profit of around £100 each.
Tom and his friend set up a website where Tom begins selling his furniture regularly, at a profit.
→ When Tom is building and selling tables and chairs for friends, family, and acquaintances, and is not making a profit, this is still classified as a hobby.
→ However, when he begins taking a more commercial approach to selling and earns a profit on his work, he will need to register with HMRC, keep detailed records, and register for VAT if he is above the £83,000/year threshold.
If you have any doubts, get in touch with HMRC, don’t wait for them to come looking.