Matthew Taylor has delivered a disappointing report on employment in the gig economy. It was so disappointing that much of the talk flowing from it was on his suggestion that we should tackle the cash economy, which appeared to me to be an entirely different issue little related to the so called gig issue, where big business and no cash is involved.
I broadcast on the issue yesterday on LBC, and for much of the day was scheduled to be on Radio 4, but like everyone else they had rather lost interest in such a damp squib of a report by the time the evening came so that one went by the wayside. But the suggestion Taylor made for a cashless economy to beat tax abuse seems to be rumbling even if the rest of the report is already filed, never again to see the light of day.
There are three issues about cash and tax abuse. The first is whether or not this is a big issue in tax abuse.
The second is the scale of that abuse and what might be eliminated by going cashless.
The third is whether getting rid of cash will solve the tax abuse. I will deal with them in turn.
On the issue of cash and tax abuse, of course the two are related. Cash does make it easier to hide income; there can be no argument about that. But there are a number of things to consider. The first is that cash really is just three per cent of money in circulation in the UK and it has to revolve a great many times if its illicit use is going to be greater than illicit activity through bank accounts as a result. In fact, that would clearly be impossible. And second, what that makes clear is that cash cannot be the big issue in tax abuse. It is an issue, indisputably. But not the big issue.
Second, what is the scale of the abuse? HMRC say that tax evasion and the hidden economy costs the UK £11.4 billion a year, or about one third of the tax gap. They define the hidden economy as occasions where an entire source of income is not declared and tax evasion as occasions where a declared net source of income is deliberately understated. For some reason only one of these sources was being quoted in the media yesterday; I have no idea why. But what is apparent that not all of either can be because of cash. That must be obvious. Evasion is entirely possible in the banked economy, and is. After all, if 10% of VAT is not paid, and HMRC agree that is the case, then very clearly banked transactions have to be involved. That is why I argued when I last estimated tax evasion of the type being discussed that it exceeded £40 billion a year. I think this a more realistic estimate by far than that of HMRC for reasons noted here, but it is, of course, still an estimate. What it makes clear, however, is that going cashless would not eliminate this problem. It is obvious that it is much bigger than cash, and that in the UK the complete failure of the government to regulate companies is a much bigger issue.
So, third, will getting rid of cash get rid of the issue? Of course it won't, is the obvious answer. That shows a gullibility that is rather surprising and an assumption that banked money will always be known to HMRC, which is candidly naive at best. When anyone in the UK can form a company for a few pounds, run it and make no declaration of money owing and then have the state strike that company off the register permanently, without consequence, when they fail to file accounts, cash is very obviously not the big evasion and the failure of state regulation is, as we have seen too often of late. The discussion of cash is just a distraction, and a very bad one at that.
But are there steps to be taken here anyway? As I said on LBC, the answer to that is that of course there are. Start with the abolition of the £50 note for which I can think of no useful function in our economy.
Then move on to the £20 note.
Then prevent anyone banking more than £500 in an account without consenting to HMRC being advised: the current £10,000 AML limit for notifications is far too high.
And after that? Just give it time: cash is dying anyway.
But in the meantime, tackle company abuse and un-notified business bank accounts. That is where the abuse is. Some answers are in section four onwards in this Bill, which I wrote. But no one wants to tackle such fundamental reforms and instead we get meaningless discussion on abolishing cash, which will not achieve a great deal at all. It really is time we got on with the big stuff.
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As chance would have it I wrote a thought on the same subject: http://www.progressivepulse.org/economics/zero-hours-or-zero-cash/
As at least 1.5million people are supposed not even to have bank accounts abolishing cash seems like a controlled experiment in barter or perhaps the return of the tally stick…
I agree Peter
I can see the reason for restricting the use of cash
But eliminating it? Not yet. Not when banking is not willing to reach many people and cannot fir their lifestyles
It seems some young metropolitan people have a cashless lifestyle already and the ATM is strictly for old fogeys!
https://www.theguardian.com/commentisfree/2017/jul/12/contactless-payments-quicker-drawbacks-cash
It’s worth noting that since April 2016, banks and building societies have not been required to deduct tax at source from interest payments. This was after introducing a new Personal Savings Allowance, which is up to £1000 interest-free for basic rate taxpayers and £500 for higher-rate tax payers. I was unaware of this previously; your article reminded me that I’d noticed that a new joint account I set up last year is paying gross interest, and whether that gave me a liability. Neither myself nor my partner earn enough to pay higher rate, so I think the answer is no, but has everyone realised that they may now need to fill in a tax return if they have additional savings interest?
Anyway, to the point of the article, why would banks and building societies now be reporting banked transactions to HMRC if there is no tax arising from them?
Mike
I very much doubt it
HMRC also say they can do it via notices of coding
I doubt that
Richard
HMRC seem to make an assumption that the interest you receive will be the same as the previous year and tax you accordingly. Thus for tiny amounts you are forced to now file a tax return if you don’t want to be over taxed. I assume George Osbourne has assumed most people won’ t notice / bother, thus HMRC gets in more tax than they should.
This will be retrospectively adjusted once data for the following year is received from banks. But you are always playing catch up on estimates.
I suspect insisting every deposit over 500GBP is reported to HMRC would result in so much reporting that HMRC would be flooded with useless information.
I suspect 1,000GBP would be better, or better still the bank could simply look at how much cash had been deposited in total over a 12 month period and then report on that annually if it exceeds 10,000GBP.
Note I said it had to be in a pre-approved account
In other words, that is where the behavioural issue is imposed and they are key
Matthew Taylor was on R4 Money Box Live earlier today,
http://www.bbc.co.uk/programmes/b08xbhgy
I didn’t realise who it was and only caught snippets but it did sound like excruciating neo-liberal drivel,
if this is the best Tories can do I’d prefer them to do nothing,
I have to say what I heard from him was both excruciating and just naive
He had bought the government line that an app will solve all tax abuse problems
Worse he said that this would put the self employed on a PAYE basis, which shows a shocking lack of understanding of real self employment
And the rest was a wall of blandness
Let us forget this idea of a cashless society. At the 3% level this covers most of our needs and cannot cause too much risk of tax abuse. Those traders who accept cash are unlikely to hoard it and will spend it back into the tax-attracting economy.
In our large towns and cities it is quite possible to manage cashless but here in Devon we regularly get power cuts caused by winter storms or summer lightning strikes – affecting cash machines, telephone and internet connections which brings everything to a stop. A float of about £100 can be very useful here. A lost or stolen wallet or handbag also results in chaos.
Townies have no idea how often power cuts happen in the countryside
I’ve lived there
One thing I always use cash for is when giving a tip, regardless of whether the main purchase is by card or cash. It at least gives a chance of the tip going to the employee.
Me too
The first is that cash really is just three per cent of money in circulation in the UK and it has to revolve a great many times if its illicit use is going to be greater than illicit activity through bank accounts as a result.
You make the same mistake that a lot of people make in measuring impact: you only think in terms of volume of money. What you miss is that the 3% of money in circulation which is cash could allow a disproportionately large number of people to fiddle small amounts of tax here and there. The net result of that is a cultural assumption that the odd fiddle here or there is acceptable behaviour. Faced with a culture like that, the serious abusers can be assured that they will get away with dishonesty.
I make no such assumption
But equally my research shows people can bank and get away with it
James it’s a fair point but it also ignores the question of scale and top down vs bottom up. It’s the same as prioritising/policing benefit fraud/errors compared to large scale tax evasion/avoidance. We could solve all of the problems at the bottom and it would be a drop in the ocean compared to tackling the top. Plus there’s the old leading by example concept that seems to be frequently forgotten by our ‘betters’.
In terms of impact vs volume then the general impression of crooked bankers and business leaders in cahoots with politicos is surely far more damaging.