Many people view cash payments as a harmless way to save on VAT when hiring services like builders, dog walkers, or tutors. However, this practice could lead to significant issues. The government is struggling to collect unpaid taxes, which could end up costing taxpayers about £2.3 billion each year due to the strain small businesses are facing.
Interestingly, banks are raising daily cash withdrawal limits for those who prefer to pay in cash. During tough economic times and increasing tax burdens, small businesses are often accepting cash to stay afloat. Activists argue that cash transactions contribute to tax evasion, and they criticize tax authorities for not addressing this issue more effectively.
Cash payments that elude HMRC are considered part of the “hidden economy,” contributing to around 5% of the £46.8 billion tax gap for the current tax year. Anyone self-employed earning above £1,000 must submit a self-assessment tax return, and small businesses with turnover over £90,000 need to start paying VAT.
This loss of revenue means the government is looking for more funds, which could lead to necessary tax hikes as confirmed by Chancellor Rachel Reeves.
So why does everyone pay in cash?
Customers often prefer cash to benefit from lower rates. While some businesses promote cash transactions for tax advantages, there’s not enough enforcement to ensure that these incomes are reported to HMRC. Many companies are struggling to make profits, with national insurance contributions on the rise and an increase in the National Living Wage.
According to the Federation of Small and Medium Enterprises, there were about 5.64 million small businesses in the UK at the beginning of the year, marking a notable growth over recent years. Cash payments remain a popular method, especially for home improvement projects, as the ongoing cost-of-living crisis and high taxes are prompting consumers to seek financial relief.
A recent poll indicated that approximately 13% of individuals use cash at salons, with 9% opting for cash to pay for home or garden work. While cash machine withdrawals might be down since the pandemic, customers are withdrawing more cash per transaction than in the past.
Large withdrawals are easily facilitated at major banks. For instance, Nationwide allows customers to take out up to £10,000 daily, and with notice, even more can be withdrawn. Tax evasion through cash is rarely penalized, leading some business owners to discuss the practice openly online.
Scott McAdam, a barber in East Sussex, humorously addresses tax inquiries on his social media, reflecting a broader sentiment among tradespeople who have long operated in cash. One builder remarked on his lifetime of cash work, dismissing the significance of tax payments. The trend is evident even on platforms like TikTok, where cash-only job listings are common.
What could be the solution?
HMRC recognizes cash payments are legal, but insists that self-employed individuals must report their earnings. However, a recent report revealed a sharp increase in tax evasion among small and medium enterprises. The Public Accounts Committee argues that HMRC is not adequately addressing the extent of tax evasion.
Bridging the tax gap is a top priority for the government, which has allocated extra funds to recover billions in tax losses by 2029-30. According to the Institute of Certified Public Accountants, cash payments without proper reporting are not merely a benign option but tax evasion that undermines public services.
Mark Garnier, a Tory MP, advocates for legislation to cap cash transactions at £500 to combat tax evasion, suggesting cash payments often signal intent to evade taxes. He asserts that consumers also share responsibility by opting for cheaper cash payments.
In response, HMRC acknowledges that the exploitation of cash payment avenues to hide actual incomes is a central challenge in closing the tax gap. They plan to enhance measures to protect tax revenue and have committed to increasing compliance staff and improving IT systems.
“We saved £8,000 by paying in cash.”
During home renovations, when the builders seemed sluggish, I asked if everything was alright. They shrugged, hinting at having cash in their pocket, which raised questions for me. My wife and I debated on how to handle large cash withdrawals without raising flags at the bank. The thought of going in to explain our intentions felt daunting and somewhat suspicious.
Surprisingly, when we finally went to the bank, the clerk informed us of increased withdrawal limits, which eased my concerns. It turned out that acquiring cash was less problematic than I anticipated, and it felt like everyone involved saw it as a normal course of action.
In the end, we spent about £40,000 in cash—about £8,000 less than if we had used bank transfers. Given our previous financial pressures from rising interest rates and childcare costs, this saving made a significant difference in our budget. Without this cash transaction, we would likely have postponed the renovations, which wouldn’t have been ideal with our living situation.
As I reflect on it, I don’t feel overly guilty. That saved money contributed to other economic activities and eventually cycled through the economy, rather than just sitting idle in our home’s equity. It’s a tricky situation, but if the opportunity arises again, I wouldn’t hesitate to consider it.
