In the Shade: Research on the UK's missing economy

Tax gaps exist in all economies. This gap needs to be as small as possible to enable healthy and robust government spending. However this requires all people and companies to willingly pay the tax they owe. This research highlights the fact that the UK currently makes it relatively easy to avoid paying tax, particularly for limited companies. As a result, the potential tax lost, which could be otherwise spent on essential government costs, is very significant and, according to these calculations, much larger than current HM Revenue and Customs (HMRC) estimates. The report takes a look at the UK’s ‘shadow economy’ – what it is and how much it is costing. It makes recommendations about how to reduce the effect that the shadow economy and resulting tax lost is having on the country. The UK tax gap is the difference between the tax that would be due if UK law operated as Parliament intended it and the amount of tax that is actually collected. There are varying estimates of this tax gap. HMRC, our national tax authority, estimate it to be £35bn.i This research suggests it could be much higher and seeks to explain how one significant part of the UK tax gap can arise, apparently unnoticed. The focus of this report is the tax lost as a result of untaxed trading income: it does not consider the whole of the UK tax gap. By extrapolating data from HMRC and EU studies on VAT not paid, this report suggests that £100bn of UK trading income may not have been recorded in accounts sent to HMRC in 2011-­‐12. It will investigate where these lost billions are. The report examines the way that the 2.8 million or more UK companies that exist are taxed and regulated. It looks at how this seemingly dry topic is in fact of crucial importance to both the economy and society at large. It does not set out to challenge the benefits of the ‘free market’; indeed, the report argues that a strong market economy as vital to the well-­‐being of the UK but suggests that this free market is being undermined by the scale of tax evasion that exists in the UK and a lack of willing on the part of governments to tackle this problem. The report argues that this is because ‘free markets’ need regulation to be effective. For example, regulation ensures that businesses operate safely, sell products that will not harm their customers, and do not exploit their staff, the environment or the communities that effectively grant them their licence to operate. Many of these necessary regulations are already in place. However, unless we can confidently identify which businesses are trading in the UK, the regulations cannot be effective. This report illustrates why it is currently difficult to identify many of the businesses to which these regulations should apply. As such it suggests that this whole edifice of regulation is at risk of falling down as a result. This, it is a suggested, is a significant threat to ‘free markets’ and the UK’s economic prosperity