Tuesday, 24 July 2012


I hate to agree with a Treasury Minister. It’s not my job to support the Government, whatever its politics. My job is to hold Ministers to account and point out the flaws in what they say – a job I have relished for more than 25 years. So when Treasury Minister David Gauke said on 23 July that it was “morally wrong” to pay your plumber or decorator cash-in-hand in return for a discount I confess I was in a dilemma. Because I think he is right.

And I go further. If you do a deal with a tradesperson to pay cash in exchange for a lower price to ‘avoid the VAT’ – as someone once said to me – then you are in a conspiracy to evade tax. You are both breaking the law.

So at its simplest I agree with David Gauke. We should not pay cash if we know, think, or suspect that the purpose of paying by cash rather than by cheque or card is to keep the transaction off the books and away from any possible investigation by HMRC.

But of course the world is more complicated than that.

Cash can be good
Most cash payments are not about tax dodging.

A small trader with a big overdraft may prefer cash to cheque so that the money does not have to go through the banking system. It also helps cash flow – this morning’s cash payment may be used to buy supplies this afternoon for the next job.

Cash is also certain. Since the banks decided to scrap the cheque guarantee card in June 2011 any cheque can bounce which means a lot of hassle and expense trying to recover the money.

And cash is cheaper. Most banks charge for each cheque paid into a business account. And every time a debit or credit card is used it costs the trader money. Not just the fee or percentage the card issuer takes but also the cost of renting the machine to take the payments.

Some people deal with cash for the simple reason that their business is so small they do not have any taxable income – like handyman Chris on the Radio Wales phone-in today who earned less than £8000 a year.

And it would be ridiculous to pay small amounts by card or cheque.

So there are a lot of reasons to prefer cash. But of course those reasons do include the disreputable one – unlike other means of payment cash does not leave an audit trail. So it is clearly the payment method of choice for those who do want to evade tax.

Cash can be bad
I am sure everyone with a home or a car has asked the cost of a job and been told one price and then a lower one ‘for cash’. That is the moment when you must suspect that evading tax is on the agenda. If the discount is 5% then it may simply be because of those other advantages of having cash rather than a payment that is more expensive, less certain, and takes more time to process. But a much bigger discount means it is probably an attempt to involve you in a conspiracy to keep the payment off the books and hidden from HM Revenue & Customs. 

Of course, tax fraud is often initiated by customers. Paul, a carpet cleaner, called the Tony Livesey show on Radio 5 Live last night to say that he charged £95 to clean a carpet. To which many householders replied  ‘what will you take for cash?’ 

So David Gauke’s attack is on the middle-class homeowner as much as the tradespeople they pay. In the short-term, of course, you both benefit personally from such as deal – the job costs you less and the trader pays no tax. That is why it is a conspiracy to defraud!

But ultimately if you do pay cash-in-hand – and even as you say it you can feel the conspiratorial wink which accompanies that phrase – everyone loses. It is the slippery slope that led to the economic woes of Greece where tax is seen as a voluntary activity – a view supported in the past by a corrupt revenue collection service.

Bigger tax dodges
But hang on, I can hear you say. What about the real tax dodgers. The richest people in the world who, the Tax Justice Network estimates, have salted away £13 trillion in tax havens many of which are British Overseas Territories or Crown Dependencies. What about the £35 billion in UK tax which is evaded or uncollected each year? That figure from HM Revenue & Customs itself. What about the cunning plans operated by accountancy and law firms big and small, often called ‘tax planning’ or ‘tax mitigation’, which allow people and businesses to wriggle through gaps in the law to emerge tax-free on the other side thumbing their nose at the rest of us and singing ‘nah nah ni nah nah’!

And hang on again, you add. Rather than lecture us about this small-time tax dodging the Government  should be tackling the major tax evoidance (as I call it) of the people who think they are too rich or too clever or too famous to pay tax like the rest of us. Only then will people on modest income struggling to make a living or to pay for essential repairs feel it is right to pay the full whack  and their taxes. Fairness goes both ways.

All that is true. But that still does not justify entering into a conspiracy to help the local gardener or decorator or mechanic evade the tax due on their modest income.

Size of the problem
Paying traders in cash is not the biggest source of tax loss to the Government. HMRC says the ‘hidden economy’ costs about £4 billion a year out of the £35 billion total ‘tax gap’. In 2008 the parliamentary Public Accounts Committee estimated that up to two million people were engaged in taking cash-in-hand to reduce their tax bill at a cost to the Revenue of £2 billion a year. All these estimates are highly speculative. And whatever the true figure it is going to be a tiny percentage of the estimated income tax receipts in 2012/13 of £155 billion and an even smaller proportion of the total tax take of £592 billion. It is certainly not the worst wrong in tax dodging. But it is still wrong. And there is no excuse for joining in. 

It is our business
Of course it is the trader’s job to keep the books accurately, report their earnings in full and pay the correct tax. And it is not our job to ensure they do that. But if you saw a mugging the street or a burglar emerging from a window carrying a computer it would not be your job to deal with that either. But shouldn’t you do something? If only shout and call the police?

So when you pay a trader in cash always ask for a receipt. Ideally, it should be from a proper receipt book with a place of business stated clearly on it. For any large amounts get an invoice – it protects you if something goes wrong. If the bill includes VAT check that the firm is registered. And never ever ask for or agree to a big discount for cash.

It won’t stop tax dodging. But you at least will have occupied a nice square of solid moral ground from which you can demand that the wealthy pay their fair share too. 

·         Tax Justice Network www.taxjustice.net
·         HMRC Measuring Tax Gaps 2011 www.hmrc.gov.uk/stats/mtg-2011.pdf
·         Public Accounts Committee Tackling the Hidden Economy December 2008 www.publications.parliament.uk/pa/cm200708/cmselect/cmpubacc/712/712.pdf
·         Report tax fraud to HMRC www.hmrc.gov.uk/reportingfraud/help.htm
·         Check if a VAT number is correct ec.europa.eu/taxation_customs/vies