The latest in an occasional series - the CIOT Q&A on a topical issue, part of our mission to explain and improve public understanding of the tax system . This one has been prepared with Gary Ashford, National Head of Tax Investigations & Dispute Resolution for RSM Tenon and a member of the CIOT's Council, and John Whiting, CIOT Tax Policy Director.
Paying cash in hand – a Q&A
Is it illegal to pay a tradesman cash in hand?
Absolutely not. But the tradesman is committing an offence if they fail to disclose their earnings to HMRC in due course in full and pay any relevant tax. Any trader with a turnover of more than £77,000 a year (excluding any exempt supplies) is required to charge VAT on their bills and pay the money to the taxman.
What about if they offer a discount for cash?
People may offer a cash discount to help with cashflow – and of course discounts get offered for other reasons too, such as bulk purchases. However, if someone offers a cash discount to hide the money from the taxman, then that is a different story. Hiding takings from the taxman is tax evasion and it is illegal. If the payer is aware this is the case they could actually be colluding in tax fraud.
I paid in cash because that suited me – if the trader is subsequently found to have omitted some takings, have I committed an offence?
Just because the trader commits an offence does not mean you have as well. If you had no idea they were going to conceal some takings, or no reason to suspect they would, you are in the clear. What draws you into the offence is if you have colluded in their fraud – if you have actively facilitated it.
Should I always expect a receipt?
No – not every trader will give you a recipt and a lack of a receipt does not mean that they are intending to hide their receipts. But receipts are a good way to control a business and as a confirmation of purchase. Some small businesses may not issue these but will still need to keep a record and fulfil their obligations to declare income to HMRC.
How much tax is lost because of undeclared cash in hand payments?
Estimates go from £2 billion a year upwards. The most recent estimate of the ‘tax gap’ (the difference between what HMRC collect and what they think should be collected) estimated that £4 billion a year is lost to tax evasion and a further £4 billion to the ‘hidden economy’. Within this, they estimate that £1.3 billion is lost to 'ghosts', those who have earnings from employment or self-employment and fail to declare any of this income, and £1.8 billion is lost to 'moonlighters', those who pay tax on their main job through PAYE but have a second job or additional income from self-employment. Of course, not all of these are tradesmen. A report from a parliamentary committee back in 2008 identified the three key ‘areas of risk’ in the hidden economy (ie where HMRC are most at risk of tax being lost) as self-employed people, such as builders and decorators, who often receive cash payments; individuals who trade on the internet; and buy-to-let landlords.
What are the Government doing about it?
Getting tougher. The Government have set a high profile target of bringing in an extra £7 billion through initiatives to tackle tax avoidance, evasion and fraud by the end of the Parliament. A key part of this are their ‘campaigns’ targeting particular trades, such as plumbers, roofers and electricians. Usually these have two stages. In the first those in the trade are targeted with publicity – articles in the trade press and personal letters – encouraging them to get their tax affairs in order if they are not already, with a reduced penalty rate, in addition to the tax itself. Hanging over this is the warning that those who do not come forward could ultimately face criminal charges. Then the second stage sees HMRC act on that threat, often using data obtained from suppliers as well as other sophisticated techniques. There have been a number of arrests of plumbers recently following that campaign and only last week a plumber from Surrey was given a 12 month prison sentence for evading income tax.
Isn’t this targeting the ‘little man’ to distract from the bigger sums lost to tax avoidance?
The other way of looking at it is that the Government are highlighting that not all tax losses are down to contrived avoidance schemes used by the wealthy. They would no doubt point out that they have strategies to tackle most if not all areas of the tax gap. Just this week they published a consultation paper with proposals to strengthen the rules on Disclosure of Tax Avoidance Schemes. They also have a consultation going on on a ‘general anti-abuse rule’ aimed at tackling artificial and abusive tax avoidance schemes.
That said, according to HMRC’s most recent ‘tax gap’ estimate, tax evasion and other illegal activity are costing the Exchequer three times as much as tax avoidance. So HMRC are right to be putting more effort into investigating and prosecuting those who seek to evade tax.
Are the government simply raising extra money without regard to how difficult things are?
Remember these are taxes that are due: the rules are there.
In all of this there is a fairness point as well. Although many people undoubtedly see a bit of ‘cash in hand’ as normal, it does mean that tax burdens fall more heavily on those who do pay all their taxes. There is a particular impact on the trader who never suppresses takings and always charges VAT: they find themselves undercut by others who flout the rules. All of that said, undoubtedly people will always be tempted by offers of getting things done more cheaply – especially in these straitened times. But this is not a new problem and there will always be a need to take action against those who seek to evade tax.
(Note to media/websites: please feel free to link to this Q&A or to quote from it provided attribution is given and it is not quoted out of context.)
CIOT External Relations Manager
Friday 27 July 2012