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Some householders paying traders in cash may be colluding in tax fraud, says CIOT

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A leading professional body has warned that a householder who pays a tradesman in cash in return for a discount, in the knowledge that the tradesman intends to conceal the income, could be colluding in tax fraud.

The Chartered Institute of Taxation said in a Q&A item posted on Friday that it was ‘absolutely not’ illegal to pay a tradesman cash in hand, and there were a number of reasons why a discount might be offered.

‘However, if someone offers a cash discount to hide the money from the taxman, then that is a different story. Hiding takings from the taxman is tax evasion and it is illegal. If the payer is aware this is the case they could actually be colluding in tax fraud.’

The CIOT added: ‘If you had no idea they were going to conceal some takings, or no reason to suspect they would, you are in the clear. What draws you into the offence is if you have colluded in their fraud – if you have actively facilitated it.’

A survey launched earlier this month by Taxation, published by Tax Journal’s publisher LexisNexis, poses ten questions to assess readers’ attitudes to tax evasion and avoidance. One question reads: ‘A builder has quoted £2,400 including VAT for work, but says he can “knock the £400 VAT off for cash”. You are clear he intends not to declare it for VAT even though he should do, though you are satisfied he will still do a good job. Do you accept the reduced price and pay cash?’

Mike Truman, Editor of Taxation, told Tax Journal today that the survey had drawn a ‘wide variety’ of responses so far.

Last week David Gauke, the Exchequer Secretary, was widely criticised after telling the Daily Telegraph: ‘Getting a discount with your plumber by paying cash in hand is something that is a big cost to [HMRC] and means others have to pay more tax’.

Asked whether he disapproved of the practice, Gauke added: ‘I think it is morally wrong. It is illegal for the plumber but it is pretty implicit in those circumstances that there is a reason why there is a discount for cash. That is a large part of the hidden economy.’

Miles Dean, Founder of Milestone International Tax Partners, suggested that Gauke had failed to understand that paying someone in cash to avoid VAT was fraud. ‘[A VAT-registered] provider of the services is obliged by law to charge VAT – if he doesn’t and the customer agrees to pay cash without an invoice the two have colluded to defraud HMRC. This isn’t tax avoidance, it is fraud,’ he said.

But Labour MP John Mann, a member of the Treasury Select Committee, accused the Treasury of operating ‘double standards’ by ‘threatening ordinary people who pay for jobs in cash while failing to get to grips with widespread corporate tax avoidance’, the Daily Mail reported.

The CIOT said on Friday that HMRC was ‘right to be putting more effort into investigating and prosecuting those who seek to evade tax’, citing HMRC’s estimate that tax evasion and other illegal activity were costing the exchequer three times as much as legal tax avoidance.

The government was ‘highlighting that not all tax losses are down to contrived avoidance schemes used by the wealthy’, the CIOT said. But it was also consulting on proposals to strengthen the rules on disclosure of tax avoidance schemes.

A proposed ‘general anti-abuse rule’ to deter or counter aggressive tax avoidance schemes is also the subject of consultation.