The Informal Economy: The Grabiner Report
Terms of reference by Lord Grabiner QC
Shortly before the pre-Budget statement made on 9 November 1999, I was asked by the Chancellor of the Exchequer to conduct an investigation into the informal, or hidden economy and to produce my report in time for the March 2000 Budget. Broadly speaking, my terms of reference were to investigate the problem, examine ways to move economic activity from illegitimate to legitimate businesses, and to recommend an action plan.
Given the time constraints, the fact that the problem impacts upon the activities of a number of Government Departments, in particular the Inland Revenue, Customs and Excise, the Department of Social Security and the Department for Education and Employment, and that there is a vast amount of relevant legislation and administrative practice, this report is necessarily something of a bird’s eye view.
I have tried to summarise in simplified form some quite complex issues. In appropriate places in the report I have made recommendations or suggestions for dealing with what I believe to be deficiencies in the existing law or practice.
For ease of reference, there is a bullet-point summary at the beginning of each chapter. My specific recommendations are highlighted in the text. A glossary of technical terms is included at the back of the report.
I should record my thanks to officials of the Treasury, Customs and Excise, the DfEE (and the Employment Service), the DSS (and the Benefits Agency), the Inland Revenue and the Home Office for their expert assistance, which has enabled me to produce this report in time. Particular thanks are due to Mike Williams and Andrew Sanderson.
Summary of recommendations
Every year billions of pounds are lost to the informal, or hidden economy. People conceal their income or the record of what they have sold in order to evade income tax and VAT. Others defraud the social security system by claiming benefit for being unemployed when they are in work. Many employers are committing or colluding in a range of different offences at the same time. Honest taxpayers have to pick up the bill.
Incentives to join the legitimate economy
Some of those in the informal economy would like to come clean. But they may not know what opportunities exist in the regular economy or how to take advantage of them. It is important to take steps to encourage these people and their businesses to become legitimate. I recommend that the Government should:
- set up a confidential telephone line to advise people on how they can put their affairs in order;
- extend the existing measures to make it easier for people claiming means-tested benefits to leave benefit and take up legitimate jobs; and
- increase the help that is given to people when they set up as self-employed.
Prevention
To prevent people joining the hidden economy, Departments must try to ensure that they are registered correctly and comply with the tax and benefit rules from the outset. I recommend that:
- people should be required to tell the Inland Revenue as soon as they start up in business, not least so that they can be offered early advice, especially about record-keeping;
- to combat identity fraud, the procedures for issuing National Insurance numbers should be tightened, in line with the regime already piloted by the Benefits Agency; and
- there should be better controls on the issue and use of birth certificates, to prevent their use as proof of identity by third parties.
Detection
For offenders who do not respond to these incentives, the best solution is to improve the rate of detection and the effectiveness of punishment. In order to detect people in the informal economy, Departments must co-ordinate and improve their investigations. They also need to be able to share the information they hold and use information from other sources to check for suspicious signs of fraud. I recommend that the Government should:
- consider ways to use information from private sector sources as a cross-check on the details people provide to Departments (such as where they live and whether they have a bank account);
- give investigators the power to make routine “reverse searches” of the telephone directory, to find the names and addresses of people who advertise businesses giving only a telephone number;
- agree common guidelines for staff about what data sharing is legally permissible and how it should be carried out in practice. There should be a central point of contact to co-ordinate the exercise and monitor its effectiveness; and
- build on the joint work already started by Departments by setting up a specific Government function or line of work, accountable for detecting and investigating businesses in the hidden economy.
Punishment
Once people in the hidden economy have been caught, there is scope to give the Government more ways to deal with them. I recommend:
- establishing a new statutory offence of fraudulently evading income tax, which would be tried in a magistrates’ court. Currently, only very large-scale tax offences are prosecuted;
- requiring people suspected of working while claiming that they are unemployed to attend the Jobcentre more frequently, and at unpredictable times, as a condition of receiving their benefit;
- more use should be made of a warning procedure, for example, to employers reasonably suspected of colluding with fraudulent benefit claims, that if they do not clean up their act, they will expose themselves to more detailed investigation and possible prosecution;
- if other measures fail to work, considering the option of punishing persistent fraudsters by removing, or heavily reducing, their right to benefit for a specified period; and
- carrying out research into the sentences imposed for benefit fraud and, in particular, into variation in the sentencing of persistent offenders.
Publicity
In order to deter people from working in the hidden economy, the Government should make greater use of publicity as a deterrent. I recommend:
- publicising both the incentives available for people to join the legitimate economy and the risks of staying in, or supporting the informal economy; and
- testing the use of advertising as a tool for changing public attitudes, insofar as they currently regard the hidden economy as socially acceptable.
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