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HMRC Tackles the "Hidden Economy"

Introduction

In accordance with newly proposed UK tax rules anyone running a business online through listing sites and similar services could face  forensic scrutiny as part of a governmental intention to crackdown on tax evasion.

By shining a spotlight on this class of business, HMRC have estimated that it will potentially raise revenues of £860 million by 2021.

Background

Data allied to taxable activity enables HMRC to detect businesses who fail to register for tax, and individuals who fail to declare a source of income. HMRC's established "bulk" data gathering powers act as a deterrent against concealing sources of income. However the current legislation is not expansive enough to capture what has been labelled by HMRC as the "hidden economy".

The established "bulk" data gathering powers of HMRC were contoured in 2011 and 2012 bringing together the existing powers under a single modern framework. In 2013, HMRC obtained further powers to access information about credit and debit card transactions online which saw a notable number of people being exposed to outstanding tax bills.

Under current legislation the data that can be required ranges from information about income, transactions, and assets as well as information to help identify taxpayers.

However, the existing legislation does not allow HMRC to require a data-holder to provide data about itself for the purposes of HMRC establishing the individual tax position of that data holder. Use of the data is also restricted and does not extend to individual consumers.

Consultation proposals

In an effort to bridge the gaps in its data gathering powers and to remain fluid, HMRC propose to increase their authority in order to cover emerging classes of data-holders and data sources.

The new legislation will largely cover internet intermediaries which many businesses now use to administer transactions and route custom for example for hotel bookings or ticket resale for events as well as smart phone app stores.

The new legislation will also look to capture electronic payment providers such as PayPal. Whilst the Financial Services (Banking Reform) Act 2013 already provides for a definition of a payment provider:

  • Section 42(5) "Payment service provider", in relation to a payment system, means any person who provides services to persons who are not participants in the system for the purposes of enabling the transfer of funds using the payment system. 
  • Section 42(6) A payment service provider has "direct access" to a payment system if the payment service provider is able to provide services for the purposes of enabling the transfer of funds using the payment system as a result of arrangements made between the payment service provider and the operator of the payment system.

The above definition does not capture "indirect payment service providers". HMRC's intent is to bring both direct and indirect payment providers within the remit of the proposed legislative changes.

HMRC believes that these new powers will provide it with new and vital ways to collect data. Allowing it to more cogently match data received with registration data and compliant business' tax returns, helping to pinpoint unregistered businesses and angle resources more absolutely on the non-compliant.

Conclusion

The proposed enhancements to HMRC's data-gathering powers would be fashioned in primary legislation, which sets out the groups of data-holders, by adding business intermediaries and payment providers; with accompanying changes to secondary legislation which sets out the types of data that can be required.

The consultation is anticipated to end in October this year and the new law is likely to come into force in 2016. 

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