An estimated 8.8% of the UK adult population were identified as participating in the hidden economy, according to research from HMRC. This figure has almost doubled since 2015-16 when the percentage was 4.9%
Another 4.8% of the population were identified as being possibly involved in the hidden economy, up from 0.6% in 2015-16. The research suggests there could be several possible ‘real-world’ explanations for this change, such as the growth of the gig economy or the impact of Covid-19 on employment.
Participation in the hidden economy was highest among younger people (17% of people aged 18 to 24), people in full-time education (20%) or unemployed (16%), and people in a more difficult financial situation (17% of those finding it very difficult).
Participation was split between three key types of behaviour. These are moonlighters, who declare some income but not all, accounted for 65% of the total; ghosts, who fail to declare any earnings to HMRC (35%); and businesses that are not VAT-registered but are assumed to have a turnover over the VAT threshold (4%).
The most common reasons mentioned by hidden economy participants for not declaring their activity to HMRC were income being too small or irregular, so they did not know had to or considered it not worth the time. About two-thirds (65%) said that reporting additional income to HMRC or registering a business for VAT would be difficult. Most (78%) stated they were unlikely to move into the formal economy within the next 12 months.
Participants’ knowledge of tax rules varied although 85% thought a business should register for VAT if their turnover was above the VAT threshold, but 18% thought that taxable income from renting properties did not need to be declared.
If caught by HMRC, most participants in the hidden economy (88%) thought they would get fined, with 32% thinking they would go to prison and 30% get a warning.