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HM Revenue & Customs achieved a return of around £4.50 for every £1 spent on tackling the hidden economy in 2006-07 and recent campaigns to encourage people into the formal economy have achieved much higher returns.

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But, according to the National Audit Office, the penalties the Department imposes when it detects people in the hidden economy are relatively low and it obtained little publicity for prosecutions.

The Department spends £41 million a year on tackling the hidden economy. Today’s report found that the Department compares well in many areas with other tax authorities. Its advertising campaigns have resulted in an additional 8,000 people registering to pay tax and it estimates that they will pay tax of around £38 million over the next three years.

The Department has also encouraged people to come forward voluntarily to pay tax owed using its Offshore Disclosure arrangements, making use of information obtained on around 400,000 overseas bank accounts held by UK residents. Around 45,000 people came forward in 2007, bringing in £400 million in additional tax at a cost of £6 million.

The number of cases detected through formal investigations by the Department was 28,300 in 2006-07, 12 per cent lower than in 2003-04. At the same time, the overall amount of tax detected increased by 13 per cent in real terms to £145 million.

The Department can impose a penalty of up to 100 per cent of tax due but in most cases the penalty is much lower. There were around 70 prosecutions in 2006-07. The Department did not secure much publicity on these cases, reducing the wider deterrent effect.

Among its recommendations, the NAO says that the Department should make more use of advertising to inform people of the benefits of working in the formal economy and change public attitudes to help reduce demand for hidden economy work. It should also develop further schemes to encourage widespread voluntary disclosure by people who owe tax.

"HM Revenue & Customs has experimented with new ways of encouraging people into the formal economy and it is managing to detect more unpaid tax. It could make better use of penalties and secure greater publicity for prosecutions to discourage people from operating in the hidden economy. With well over £1 billion in unpaid tax each year, it is important that the Department becomes more effective in tackling the problem."

Tim Burr, head of the National Audit Office


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