Addressing the hidden economy – New tax checks on licence renewal applications
HMRC recently published draft legislation, which is a measure to introduce a new tax check for applications to renew some licenses. This will address part of the hidden economy. The hidden economy is sources of taxable income that have not been declared to HMRC.
Those likely to be affected are individuals, partnerships (including limited liability partnerships (LLPs)) and companies applying for licences in England and Wales to either drive taxis or private hire vehicles (PHVs), or both, operate a PHV business or deal in scrap metal.
An applicant who wishes to renew a licence will need to carry out a tax check. The licensing body (typically a local authority) will have to obtain confirmation from HMRC that the applicant has completed the check before being able to consider their renewed licence application.
The hidden economy consists of individuals and businesses with sources of taxable income that are entirely hidden from HMRC. This deprives the government of funding for vital public services. The hidden economy tax gap (the difference between the amount of tax that should, in theory, be collected by HMRC, and what is actually collected) is estimated to be £2.6 billion for 2018 to 2019.
The hidden economy also distorts competition and is linked to wider rule-breaking and criminality, including money laundering, health and safety violations, failure to comply with employment rights and immigration offences. HMRC is committed to levelling the playing field for legitimate businesses and has a continuing programme of operational work to tackle the hidden economy.
Many people operating in the hidden economy do so because they are unaware of or confused about their tax obligations. If they have been hiding their income for a long period they are also likely to find it harder to come forward and tell HMRC that they are, or should have been, chargeable to tax (‘registered’).
Conditionality aims to address part of the hidden economy by helping applicants for certain public sector licences better understand their tax obligations and by making access to the licences they need to trade conditional on completing a tax check. It is an innovative, cost-effective and simple way to tackle this part of the tax gap and help level the playing field, making it more difficult for people to enter or stay in the hidden economy.
The government is considering extending this reform to Scotland and Northern Ireland in the future and will work with the devolved administrations to this effect.
The government intends to consult on extending the principle of conditionality to other sectors over time.
Budget 2020 announced that the government will legislate in Finance Bill 2020-21 to make the renewal of licences to drive taxis, drive and operate private hire vehicles (PHVs) (for example minicabs) and deal in scrap metal conditional on applicants completing checks that confirm they are appropriately registered for tax.
This measure will have an effect on applications made from 4 April 2022.
Impact on business including civil society organisations
The measure will have a significant impact cumulatively on around 400,000 businesses who are expected to hold licences in the relevant sectors by 2022 to 2023. Each time they apply to renew their licences businesses will need to use the new digital service or the alternative route provided for digitally excluded customers to demonstrate whether they have notified their chargeability to tax.
One-off costs will include familiarisation with the new requirement and could include updating internal processes and creating a government gateway account if the business does not have one already.
Continuing costs will arise from businesses completing the tax check each time they renew their licence. This includes gathering any necessary information to do this. The tax check will be completed online or via the alternative route provided for digitally excluded customers.
Customer experience is expected to improve as the tax check will give compliant businesses reassurance that HMRC is directly tackling their non-compliant competitors. It will also assist non-compliant businesses that wish to comply by directing them to support to get their tax affairs right.
This measure is not expected to impact civil society organisations.
Small and micro business assessment: The majority of businesses affected by this change are micro and small in size since licensed drivers make up the greater part of the population affected by the measure. Omitting small and micro businesses from the change would negate the purpose of the measure. The measure is expected to benefit compliant micro and small businesses by preventing non-compliant competitors from gaining an unfair financial advantage. HMRC will ensure that small and micro-businesses who may be digitally excluded or need extra support are directed towards additional help, via established HMRC processes.
Draft legislation published for Finance Bill 2020-21
The government is committed, where possible, to publishing most tax legislation in draft for technical consultation before the relevant Finance Bill is laid before Parliament.
The consultation on draft clauses is intended to make sure that the legislation works as intended.
The consultation will close on 15 September 2020.
If you have any questions about this change, please contact ISBC Policy and Strategy by email: firstname.lastname@example.org
For all information on New tax checks on licence renewal applications go to www.gov.uk