LORD GRABINER'S REPORT ON THE INFORMAL ECONOMY

Follow this link to find Lord Grabiner's full report on this website

New measures to help people move from the hidden economy into legitimate work - and tough new powers to detect and punish offenders who refuse to do so - are the main recommendations of Lord Grabiner QC's report on the informal economy published today.

The report suggests that every year billions of pounds have been lost to the informal economy. The report estimates that 120,000 are working while 'signing on' at a cost of nearly half a billion pounds to the taxpayer.

Chancellor Gordon Brown welcomed the report saying:

"Lord Grabiner's report suggests that for years billions of pounds have been lost to the informal economy every year, leaving honest, hard working taxpayers, who play by the rules, footing the bill for those who either don't pay the taxes they owe or claim benefit while they are working.

"His clear and comprehensive strategy, based on opportunities tied to new obligations is designed to tackle the informal economy with a package of new rights and new responsibilities. It proposes incentives to encourage people into legitimate work - and tough new penalties for those who fail to do so and continue to defraud the rest of us.

"The government is delivering more opportunities than ever before to work. Vacancies are at record levels and step by step we are removing the barriers to employment. But just as there are more opportunities, so too we believe new obligations.

"Defrauding the benefit system, means defrauding the poor and preventing us getting the resources to those in need. We would be failing in our obligation to those who need the benefits system if we allowed people to defraud it.

"I welcome Lord Grabiner's report and in the Budget will announce in detail how we will implement his recommendations."

The report, "The Informal Economy", proposes new measures to tackle the hidden economy whilst at the same time making clear that some people get trapped in the informal economy because they are not aware of the legitimate opportunities that are available.

Lord Grabiner concludes that the Government should introduce new ways to tackle for those who persist in the hidden economy: including:

new legislation to introduce a new statutory offence of fraudulently evading income tax, to be tried in the magistrates' court;
subjecting people, suspected of working while signing on, to additional requirements by requiring them to sign on more frequently and at unpredictable times;
as in the USA, a 'two strikes and you are out' approach - for the first time, removing people's right to claim benefit for a specified time if they have been convicted twice; and
giving investigators the power to trace suspects by making routine 'reverse searches' of the telephone directory.

Among his other 17 recommendations, Lord Grabiner proposes incentives to encourage people into legitimate work including recommendations to:

set up an anonymous, confidential telephone line to advise those in the hidden economy about how they can put their affairs in order, and how the tax and benefit rules apply to them;
build on the help that is given to people who start out in self-employment and extend recent changes to make it easier for people claiming means-tested benefits to leave benefit and take up legitimate jobs; and
launch a new advertising drive to publicise the incentives available for people to join the legitimate economy, including the Working Families Tax Credit, and the punishment they will face if they stay in the informal economy.

NOTES TO EDITORS

In the Pre-Budget statement in November 1999, the Chancellor asked Lord Grabiner QC to conduct a review into the hidden economy and to report back in time for Budget 2000.

Lord Grabiner is a senior barrister, who heads a leading commercial law practice. He was made a life peer in 1999. He is also chairman of the Court of Governors at the London School of Economics and Political Science.

Lord Grabiner was assisted by a taskforce of officials drawn from HM Treasury, the Inland Revenue, Customs and Excise, the Department of Social Security and the Department for Education and Employment.
"Reverse searching" of the telephone directory consists of using a telephone number to find a person's name and address. Data protection rules forbid it, though there are exemptions in the public interest e.g. for the emergency services. Inland Revenue investigators cannot currently use reverse searching as a tool for tracking down businesses in the informal economy. Customs and Excise currently have these powers.

Unemployed people claim Jobseeker's Allowance, which is administered jointly by the Employment Service and the Benefits Agency. As a condition of benefit, they must attend a regular appointment (i.e. sign on) at the Job centre, usually every fortnight.

Media copies of Lord Grabiner's report are available from the Treasury Press Office on 020 7270 5187/5185.

Non-media copies are available from the Treasury Public Enquiry Unit on 020 7270 4558.

The summary of Lord Grabiner's recommendations and some examples of the hidden economy are attached.

SUMMARY OF LORD GRABINER'S RECOMMENDATIONS

Every year billions of pounds are lost to the informal economy, 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 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 Job centre more frequently, and at unpredictable times, as a condition of receiving 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.

REAL EXAMPLES SHOWING THE RANGE OF THE HIDDEN ECONOMY

Unemployed man with family, claiming Jobseeker's Allowance, did a few decorating jobs, cash-in-hand, for neighbours to earn some extra money before Christmas. Failed to declare earnings (but not liable for income tax).
A couple where the wife worked full time at a nursing home, and the husband claimed Jobseeker's Allowance without reporting her earnings.
Lone parent claiming Income Support, who failed to declare her job as a market trader, and that she was living with her partner who was in full-time work.
A man who worked for a number of employers, using false identities, and claiming benefit at the same time.
A firm of drivers where the employer failed to provide a full list of employees and kept two sets of financial accounts. He also colluded in benefit fraud by allowing employees time to sign on as unemployed.
A coach company where the employer left out claimants from lists of employees supplied to the Benefits Agency, and falsified dates and wages.
Visits to 11 firms in the clothing industry found that 106 out of 365 employees had irregular benefit claims. False records had been given to the Inland Revenue in several cases, and over £100,000 was assessed in unpaid VAT.
An agricultural firm where 28 out of 125 employees were wrongfully claiming benefits, and 8 were arrested as illegal immigrants.
Customs estimate that nearly £1 billion of revenue is lost each year from cross- Channel bootlegging of tobacco and alcohol. Over 90% of those involved are thought to be claiming benefits.
A London-based organisation of bogus companies specialising in large-scale benefit, mortgage and property fraud; importing illegal immigrants; and cocaine dealing. Evidence of over 500 fraudulent benefit claims, worth around £4 million. 50 known cases of identity fraud. Over 40 claims for Child Benefit supported by counterfeit identity documents.