Tackling the hidden economy

HMRC has published three concurrent consultations on measures to tackle the hidden economy. These cover:

·         extension of HMRC’s data-gathering powers to money service businesses;

·         making access to business services conditional on registration for tax; and

·         new penalties and sanctions for those operating in the hidden economy.

All three consultations close on 21 October.

Tackling the hidden economy: extension of data-gathering powers to money service businesses (see http://bit.ly/2byQRZ5): contains proposals to extend HMRC’s bulk data-gathering powers to include data which money service businesses (MSBs) hold on their customers’ identities and the frequency, volume and aggregate value of transactions carried out by those customers.

HMRC’s existing powers under anti-money laundering legislation allow it to obtain information about money service businesses themselves, but not about the customers of those businesses. Existing powers under tax legislation can be used to obtain information about named taxpayers, but not bulk data.

The consultation therefore proposes adding money service businesses as a new category of ‘relevant data-holder’ under the existing bulk data-gathering legislation in FA 2011, Sch 23. The new definition would cover all entities performing MSB services, including those whose principal anti-money laundering supervisor is not HMRC, but it would exclude institutions such as banks, building societies, credit unions and friendly societies.

Details of what will be included within the ‘relevant data’ required by HMRC would be contained in regulations. This is likely to include names and addresses of individual customers, or the registration number and registered address of business customers. It would also include data relating to the number and aggregated value of transactions by the customer through the MSB.

HMRC would expect this data to be sent electronically and in a standardised format and the consultation seeks information on the systems, formats and software businesses in the sector currently use.

The consultation stresses that the new powers are not intended to allow HMRC to obtain further information about an MSB’s own tax position and will not target particular groups or communities who are more likely to make use of MSB services.

Tackling the hidden economy: conditionality (see http://bit.ly/2bxjBY6): consults on the principle of introducing the condition that businesses must be able to prove tax registration before they can gain access to certain business services. This principle is referred to as ‘conditionality’. Approaches being considered include:

·         targeting application of tax registration at certain public sector licences (and potentially some licences issued by professional or representative bodies); or

·         making tax registration a condition of access to services such as insurance, business bank accounts, rental of premises, loans, merchant acquirer accounts, or accounts with suppliers or utilities.

‘Registration for tax’ might include self-assessment for sole traders or partnerships, corporation tax for new limited companies, PAYE for employers, or VAT. Methods for verifying the tax registration status of a business might include:

·         denying access to relevant licences or services for a business until its tax registration is verified; or

·         requiring licence or service providers to collect tax-registration data from customers and share this information with HMRC.

The consultation also considers whether to allow a grace period in circumstances where formal tax registration is not required until a business has commenced trading.

HMRC’s general principles for applying ‘conditionality’ are to:

·         prioritise high-risk sectors;

·         minimise new burdens on customers and service providers;

·         target ‘gatekeepers’;

·         reach large numbers of businesses in the hidden economy; and

·         seek wider benefits.

Tackling the hidden economy: sanctions (see http://bit.ly/2c1RSeF): consults on the potential for new penalties and sanctions to target individuals and businesses operating in the hidden economy, including those who have already been penalised for non-compliance. The proposals include:

·         amending the existing ‘failure to notify’ penalty regime so that a second failure to notify attracts a higher penalty rate than a first failure;

·         non-financial deterrents such as increased monitoring through an extension of the managing serious defaulters programme; or

·         other measures, such as sanctions for illegal working where immigration offences are involved.

Amended ‘failure to notify’ penalties could involve either:

·         simple escalation, with increased penalty percentages for second and third failures; or

·         applying the same penalty percentages as deliberate failures to second and subsequent failures.

Particular consideration would have to be given to:

·         the rate of escalation;

·         the period in which the repeat failure must take place;

·         cases of phoenixism (where a company is dissolved leaving debts, but trading continues through a new company, often with the same personnel);

·         retaining incentives to disclose;

·         application to different taxes and obligations;

·         proportionality; and

·         interaction with the offshore penalties regime.