Paying a plumber cash in hand is "morally wrong" because it denies the revenue vital funds, a Treasury minister said as the government outlined new ways of cutting down on £5bn in tax avoidance.
David Gauke, the exchequer secretary to the Treasury, risked shining a spotlight on whether any of his government colleagues have ever made cash in hand payments to plumbers when he described the practice as a large part of Britain's "hidden economy".
The minister spoke out after delivering a speech on the next steps for tackling tax avoidance at the Policy Exchange thinktank.
"Getting a discount with your plumber by paying cash in hand is something that is a big cost to the Revenue and means others must pay more in tax," Gauke said.
Asked whether he disapproves of the practice, Gauke said: "Yes, I think it's morally wrong. It is illegal for the plumber, but it is pretty implicit in these circumstances that there is a reason why there is a discount for cash. That is a large part of the hidden economy."
Gauke admitted that some of his colleagues may have made cash in hand payments, though he denied having paid cash himself to a tradesman to gain a discount. "I've never said to a tradesman: 'If I pay you cash, can I get a discount?'," he told BBC's Newsnight.
Asked if colleagues had done this, Gauke added: "I don't know, but if people do do that they have to do so with the recognition that means taxes will be higher for the rest."
HMRC has raised more than £500m in the past year after launching campaigns focusing on particular areas such as plumbers and electricians. Another campaign focusing on home repairs will be launched later in the year.
The Revenue on Monday welcomed the jailing last Friday of a Surrey plumber who evaded £50,000 in income tax. Melvyn Careswell, 49, from Epsom, was sentenced to 12 months in prison after failing to register his earnings despite setting up a plumbing company.
Chris Martin, the revenue's assistant director, criminal investigation, said: "Careswell stole from UK taxpayers by failing to pay tax due on his earnings and now he must face the consequences of his actions in jail. HMRC is clamping down on plumbers and those in other trades who attempt to commit tax evasion, and the sentence given to Careswell will act as a deterrent."
A government source pointed out after Gauke's remarks that it is not illegal to make a payment in cash or to be asked to be paid in cash. It is up to the trader to declare any tax, though the Revenue expects customers to act as "good citizens".
Gauke said that tax avoidance deprived the public purse of £5bn a year. "It is important to recognise the scale of the problem," Gauke told Policy Exchange. "Last year, HMRC collected £474bn in tax.The tax gap – the difference between what is owed and what is collected – is about £35bn. Tax avoidance (as opposed to tax evasion, the hidden economy, criminal attacks and other aspects of the tax gap) accounts for just 14% of this gap – around £5bn or about 1% of total liabilities."
Gauke made his remarks as he announced plans to force "cowboy" financial firms to disclose the names of clients who use aggressive tax avoidance schemes. Firms will also be forced to disclose how tax avoidance schemes work.
"These kinds of schemes are where we are focusing our efforts, and they are all, to borrow a phrase from the chancellor, 'morally repugnant'," Gauke said. "These schemes damage our ability to fund public services and provide support to those who need it. They harm businesses by distorting competition. They damage public confidence. And they undermine the actions of the vast majority of taxpayers, who pay more in tax as a consequence of others enjoying a free ride."
Gauke also broke new ground for Treasury ministers, who do not usually comment on the tax affairs of an individual or an individual company, when he indicated that the BBC may have been complicit in tax avoidance. The corporation has been criticised for allowing some of its stars to be paid through companies rather than the usual PAYE payroll.
"You are not the first to mention the BBC," Gauke said when asked whether he had raised the issue of the BBC. "Personal service companies are not necessarily always there for tax avoidance purposes. But where arrangements are artificial, where they are contrived and designed for the purpose of reducing the national insurance contributions liability of the employer or the employee or both, then those artificial arrangements do constitute tax avoidance and that is something HMRC will and should take seriously.
"I don't want to be drawn into individual cases as they depend on the individual circumstances. But tax avoidance is tax avoidance."
The remarks by Gauke on plumbers may risk a rerun of the early days of Bill Clinton's presidency when a series of nominees for cabinet posts had to turn down job offers after it emerged that they had failed to pay social security for domestic staff. Zoë Baird, Clinton's first nominee for attorney general, withdrew after it emerged that she had failed to pay social security to illegal immigrants she had hired as domestic staff.
In his speech, Gauke drew on classical history to say that tax avoidance is not a new phenomenon. "Tax avoidance is not a recent problem. In the fourth century AD, the Roman Emperor Valens had to make it illegal for individuals to sell themselves into slavery to avoid tax. And while this particular ruse seems to have fallen out of fashion, there will always be some who seek to shirk their civic duty.
"Just like every country at any time in the history of government, there is still work to do to ensure everyone pays what they should. But it is important to get a sense of perspective on our position – both in the context of recent history, and internationally."
