Taxman takes on the hidden economy

Newcomers to contracting unsure about when to declare income and register with HM Revenue & Customs risk being caught by a new clampdown on the hidden economy.

HMRC says it will make it “increasingly difficult” to enter and operate in the ‘hidden economy’ – defined as ‘traders who fail to register for tax and people who fail to declare a source of income.’

Tim Stovold of accountancy firm Kingston Smith confirmed to ContractorUK: “Where HMRC uncovers trading profits which have not been declared, they will be unsympathetic to a plead of ignorance of the rules,” he said.

For aspiring and new contractors, this unforgiving stance by HMRC may prove problematical – not to mention costly, in terms of financial penalties.

Indeed, questions about what income to declare and when, especially by ‘permies’ who want to start contracting ‘on the side’, are among the most frequently asked when people begin working independently.

Yet fortunately such enterprising individuals are not the primary targets of the consultation proposal. Rather, HMRC wants to extend its powers so it can gather data from ‘third parties’ who may be unwittingly supporting the hidden economy.

These third parties, notably electronic payment providers like Paypal, and business intermediaries such as app stores like iTunes, seem to be allowing individuals and small traders to generate income below the Revenue’s radar.

So the tax authority is taking action. To explain its need to data-grab from business intermediaries, which would include eBay and the likes of, HMRC said:

“Where a business is using an intermediary to offer goods and services, HMRC believes that the intermediary will be able to provide valuable information that can identify sellers that have not registered with HMRC or who have not declared the full value of their sales.”

As to e-payment providers, it said: “To ensure that these methods [‘digital wallets’ and other payment models not covered by HMRC’s existing data powers] do not become a natural hiding place for those wishing to evade tax…HMRC [proposes] to receive aggregated and/or transactional level data from these and other newer types of payment provider.

“In doing so,” adds the consultation, “HMRC proposes that the legislation is ‘future-proofed’ so similar data can be requested from new business models as they emerge.”

By granting HMRC these data powers, it is estimated that they will help towards raising up to £285million from the hidden economy in 2020-21. Affected parties can have their say (and potentially answer the consultation’s 8 questions) by emailing their comments no later than October.