HM Treasury

Taxation, work and welfare

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:

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:

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:

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:

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:

The Grabiner Report is available below in Adobe Acrobat Portable Document Format (PDF). If you do not have Adobe Acrobat installed on your computer you can download the software free of charge from the Adobe website.

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