HMRC is aware that many people operate in the ‘shadow’ or ‘informal’ economy. HMRC’s recent approach has included specific ‘campaigns’ to encourage those in particular industry sectors to inform it about undeclared business activities and ‘moonlighting’.

Details of previous and current HMRC campaigns can be found at http://www.hmrc.gov.uk/ris/hmrc-campaigns.htm.

It is clear that individuals who do not avail themselves of the chance to declare all their income during one of these campaigns can face tougher action from HMRC, including higher penalties and even prosecution. For example, following the ‘Plumbers Tax Safe Plan’, which started in March 2011, 1,000 civil cases have been prepared and 9 ‘ghost’ plumbers arrested.

Although the number of prosecutions for tax evasion is relatively small, HMRC has said that it expects this to rise five fold.

Another recent development is HMRC using the Proceeds of Crime Act against an individual who had not declared all his income (Gareth Edward Steed v The Crown [2011] EWCA Crim 75). This was a complex case involving suggestions of illegal activities, but a key point is that failing to notify HMRC of a liability to tax can open the door to a challenge of cheating the public revenue. The result, in this specific case, was a confiscation order for £707,200, even though the tax due on undeclared ‘moonlighting’ earnings had been determined at only £3,558 a year.

In addition to activity initiated by HMRC, there is also the HMRC Tax Evasion hotline, which allows members of the public, including casual acquaintances and relatives, to anonymously report anyone suspected of tax evasion, such as working in the ‘informal’ economy.

Where HMRC takes the initiative and discovers tax evasion, it can impose a penalty of up to 100 per cent of the tax owed, although in most cases the penalty is lower. Interest is payable on the unpaid tax which can significantly increase the bill over time.

The consequences of voluntary disclosure are normally much less harsh than if you wait for HMRC to find out about you. If you want free, confidential advice and information on declaring your income, phone the TaxAid helpline.