HMRC announces plans to clamp down on tax non-compliance in the hidden economy

HMRC is proposing to make access to licences required for trading in sectors such as private security, taxis, waste management and retail and trade conditional on tax compliance, a move known as 'conditionality'.

HMRC said the plans fit with its strategy of tackling non-compliance by preventing it from happening in the first place. It said the size of the tax gap from the hidden economy – individuals and businesses with sources of taxable activity hidden from HMRC – represented 10% of the total tax gap and was worth around £3.5 billion.

The proposals (37 page / 548KB PDF) follow a consultation last year on the principles of developing conditionality. The new consultation focuses on initial changes to introduce tax-registration checks into some licensing processes administered by public bodies.

The options proposed for ensuring those applying for licences are correctly registered include guiding new applicants towards tax obligations and HMRC services and checking that applicants renewing a licence can provide evidence of their tax-registration status. However, HMRC has not suggested licensing authorities should carry out more detailed tax checks.

According to HMRC, the aim of the measures is to determine whether or not a person or company should have registered for self-assessment or corporation tax, or should have enrolled employees for tax. However, the checks proposed by HMRC would not determine whether someone should have registered for VAT or their employment status.

Once the consultation is complete the government plans to bring forward draft legislation to implement conditionality, with the possibility of making changes to a small number of licence types initially.

In the longer term, the aim is to use the proposals as a road map to developing conditionality on a wider scale, such as in situations where private sector providers offer services to businesses. HMRC said in time simple tax checks could be integrated into more of the essential services or platforms that businesses use to trade.

The consultation is open until March 2018.

Tax expert Paul Noble of Pinsent Masons, the law firm behind Out-Law.com, said: “Driven by governmental pressure to reduce the ‘tax gap’ over the past few years we have seen HMRC become ever yet more inventive in the ways that it seeks to reduce what they perceive as tax avoidance and evasion. In doing this, HMRC look to assert pressure where they can. Linking the issuance of licences to tax compliance is very much along these lines.”