Open consultation

Tackling the hidden economy: expanding tax conditionality to new sectors

Published 30 October 2024

Background

Subject of this consultation

This consultation proposes expanding tax conditionality to new sectors. This would require licence holders in specific sectors to undertake checks that confirm they are appropriately registered for tax.

Scope of this consultation

This consultation suggests expanding the existing tax conditionality check to licences in the waste, animal welfare and transport sectors across the UK. 

This consultation seeks input from stakeholders on the suitability of applying tax conditionality to these sectors across the UK.

Who should read this?

The government seeks views from those involved with licences, registrations, exemptions and permits in the waste sector, including waste carriers, brokers and dealers; animal welfare licences, including dog breeders, animal boarding and pet selling; and specific licences for vehicles in the taxi and private hire sector across the UK. This includes licence applicants, licensing bodies and providers, their representatives or professional bodies and those with expertise in tax administration.

Duration

The consultation will run for 12 weeks from 30 October 2024 to 31 January 2025.

Lead official

The lead officials are Rhianwen Morris and Jyoti Mistry of HM Revenue and Customs (HMRC).

How to respond or enquire about this consultation

Responses to this consultation can be provided by answering the consultation questions.

Please submit email responses to: isbcehepolicyconsultations@hmrc.gov.uk

Additional ways to be involved

HMRC will hold a limited number of meetings with trade sector bodies and representatives. Please email isbcehepolicyconsultations@hmrc.gov.uk  if you would like to be involved.

Discussion meetings will be organised following publication.  

After the consultation

HMRC will publish a summary of responses as soon as possible after the consultation period and the government will consider whether and how to extend tax conditionality to new sectors.

Getting to this stage

This document builds on previous consultations on tax conditionality and the hidden economy; responses to those consultations were published in 2017, 2018 and 2021. In 2022, the government introduced tax conditionality in England and Wales and from October 2023 in Scotland and Northern Ireland for licences in the taxi and scrap metal sectors.

Previous engagement

HMRC met with a range of stakeholders as part of the 3 previous consultations covering tax conditionality. HMRC officials have also met with officials in the devolved administrations while developing these proposals. This is the first discussion document on expanding tax conditionality into other sectors.

1. Introduction

The Hidden Economy

1.1. The majority of UK taxpayers pay what they owe, but a small minority seek to evade or avoid paying their fair share. The hidden economy consists of individuals and businesses with sources of taxable income that are entirely hidden from HMRC. The hidden economy tax gap is estimated to be £2.2 billion for the year 2022 to 2023 and equates to approximately 5% of the overall tax gap. The tax gap is the difference between the amount of tax that should, in theory be paid, and what is actually paid.

1.2. HMRC is committed to reducing non-compliance and closing the hidden economy tax gap. Central to this aim, is our ability to promote compliance by helping customers to get things right, prevent non-compliance by using data and system design to block fraud and prevent mistakes.

1.3. The hidden economy deprives the government of funding for vital public services, distorts fair competition between businesses and places unfair burdens on the compliant majority who pay their fair share of taxes.

1.4. Many people operating in the hidden economy do so because they are unaware or confused about their tax obligations and think it will be difficult to declare their income to HMRC. Others do so knowingly to gain a personal or competitive advantage.

1.5. Addressing the hidden economy ensures a level playing field for those who comply with their tax obligations. This means working to improve the ways in which customers register for tax and report their income; helping them to get things right the first time. HMRC also make it increasingly difficult for businesses and individuals to enter the hidden economy and will robustly tackle those who continue not to pay the right amount of tax.

1.6. HMRC is continuously exploring opportunities for new and innovative communication approaches to help ensure taxpayers are aware of and understand their obligations; including harder to reach groups. Joining up with other public bodies through conditionality complements that approach. Conditionality means the setting of requirements or standards regarding tax compliance on an individual or business when licences need to be renewed.

1.7. At a first application for a licence, it would help new business with clear practical guidance on their tax obligations and how to meet them; and at renewal, it would ensure, through a brief online tax check, that established businesses are appropriately registered for tax^{[footnote 1]}, as they should be.

1.8. HMRC is focused on ensuring that this process is as easy as possible, including for customers who need to come forward and register for tax. That will include help for customers who require additional support, or who are unable to engage with HMRC through digital services. HMRC will continue to explore opportunities for new and innovative communication approaches to help ensure that taxpayers, including harder to reach groups, understand their obligations.

1.9. HMRC’s operational experience also shows that those in the hidden economy may also demonstrate non-compliance with other regulatory requirements including health and safety violations, failure to comply with employment rights for workers and immigration offences. By tackling the hidden economy, HMRC can support other government initiatives and limit wider non-compliance.

The aim of conditionality

1.10. Many businesses require licences or other approvals from parts of local or national government in order to trade. Where licence holders are receiving income that is taxable, they should be reporting that income to HMRC.

1.11. Conditionality aims to address part of the hidden economy by helping applicants for certain public sector licences better understand their tax obligations and by making ongoing access to the licences they need to trade, conditional on completing a tax check. It also promotes tax registration at the right time and helps customers better understand their obligations to register for tax and the simple steps they need to take to declare their income to HMRC.

1.12. This policy supports a key aim of our strategy – to close the hidden economy by preventing people from entering it in the first place. Tax conditionality is a cost-effective and simple way to design out non-compliance, tackle this part of the tax gap and help level the playing field making it more difficult for people to enter or stay in the hidden economy.

1.13. Closing the hidden economy tax gap is in everyone’s interest and has wider benefits to society. Compliant businesses benefit from a level playing field where everyone pays their fair share of taxes and the broader benefits from the additional tax that is protected through closing the £2.2 billion hidden economy tax gap.

1.14. Expanding the tax checks to new sectors will build tax compliance into the process of doing business. This supports our strategy to help customers to easily comply with their tax obligations at the earliest opportunity.

1.15. Through this consultation, HMRC’s aim is to establish if this approach can be expanded to further licences.

Previous policy development and consultation

1.16. HMRC has consulted extensively with stakeholders on tax conditionality including 3 formal public consultations.

1.17. First, in the document Tackling the Hidden Economy: Conditionality published in August 2016. This consultation discussed the underlying principles of hidden economy tax conditionality and explored its practical delivery, and the services and sectors in which it could be an effective compliance tool. The majority of responses agreed that HMRC should be focusing on new approaches to tackling the hidden economy and recognised that conditionality could be an effective way to support compliance.

1.18. Second, in Tackling the hidden economy: public sector licensing published in December 2017. This consultation proposed introducing checks on applicants’ tax-registration that would be linked to licensing processes. It suggested potentially suitable licensing regimes, sought comments on their suitability and outlined ways in which tax-registration checks could be administered and enforced.

1.19. Finally, in the document Hidden Economy Conditionality - Northern Ireland and Scotland published in March 2021. This consultation proposed extending the renewal of licences in the taxi and scrap metal sectors in Scotland and Northern Ireland, making it conditional on applicants completing checks that confirm they are appropriately registered for tax.

1.20. In response to deploying tax conditionality in the taxi and scrap metal sectors, the majority of stakeholders supported the principle of applying tax checks to licensing, providing that any administrative burden was minimised. Representative groups such as local authority representatives and trade representatives were actively involved in the development of this policy.

1.21. Taxpayer representatives suggested it could be a valuable tool in tackling non-compliance, licensing body representatives suggested the checks could be incorporated into the licensing regime relatively simply. Other representative groups said they welcomed the check as a way of supporting compliance in the relevant sectors. This engagement took place during the development and consultation stages of the draft legislation.

1.22. In April 2022, the government introduced conditionality^{[footnote 2]} to make the renewal of licences to drive taxis, drive and operate private hire vehicles (PHVs) (for example minicabs) and deal in scrap metal in England and Wales conditional on applicants completing checks that confirm they are appropriately registered for tax. In October 2023^{[footnote 3]} this was extended to similar licences which operate in Scotland and Northern Ireland. The process of gathering insight and feedback from individuals in the sectors is ongoing and post implementation feedback suggests the measure has been well received.

1.23. In building up its assessment of the original tax conditionality policy, the government analysed data held on HMRC systems, alongside wider insight. It estimated the proposals would generate £260 million as a result of bringing people out of the hidden economy.

1.24. Customer feedback from the existing policy shows that users found the tax check easy and quick to complete.

Selecting the sectors to be subject to a tax check

1.25. The hidden economy is a problem throughout the UK and is not uniquely associated with any one industry or sector. We also know that people who are operating in the hidden economy may not be doing so deliberately. However, the hidden economy can be a problem where sectors have high levels of self-employment with a requirement to notify liability, or high numbers of small or micro-businesses.

1.26. Where HMRC has carried out compliance activity, or where third-party data suggests a problem posed by the hidden economy, it’s important that we take steps to prevent people falling into non-compliance, as early as possible.

1.27. Licensing provides a proportionate vehicle for this, providing that the licensing rules are compatible with the principle of a tax check and the check itself is easy to fulfil.

1.28. The criteria HMRC used to identify new sectors for the potential expansion of tax conditionality are:

• alignment of conditionality with existing rules: licences in scope have existing conditions that align reasonably well with legal obligations to register for and pay tax
• risks posed by the hidden economy: while good standards of overall compliance exist in the sectors selected, they are vulnerable to exploitation by a minority who wish to undercut their competitors by operating in the hidden economy
• potential wider benefits: by integrating regulatory standards and developing closer working between HMRC and other parts of local or national government, there may be opportunities to drive up standards

Scope of the consultation

1.29. This consultation is intended to help HMRC to develop proportionate measures which work in the interests of compliant customers.

1.30. This consultation suggests expanding the existing tax conditionality check across the UK to specific sectors which HMRC believes would be suitable for tax conditionality to be applied. These are:

• registrations and permits in the waste sector
• licences in scope of animal welfare legislation
• further licences in the transport sector

1.31. Throughout this consultation we refer to applicants applying for or renewing a licence. For the purpose of this consultation, we mean any licence, permit, exemption, registration, or approval issued by the appropriate regulatory or governing body.

1.32. Where regulatory activity is devolved, schemes can differ in each nation of the UK and this consultation seeks input from stakeholders on how best the government can implement this reform in similar schemes which operate UK wide.

1.33. This consultation seeks views on the suitability of the expansion and whether any changes need to be made. The final implementation will be informed by the outcome of this consultation.

1.34. We welcome comments from licence holders, licensing, permitting and registration bodies, representative bodies, and trade bodies who participate in or represent the relevant sectors.

2. How conditionality operates

2.1. As set out in chapter one, the government has conducted 3 previous consultations on tax conditionality and has engaged with a wide range of stakeholders when developing this policy. In April 2022 it implemented this policy in England and Wales within certain licences in the taxi and scrap metal sectors. Equivalent licences in Scotland and Northern Ireland followed in October 2023.

2.2. An applicant who wishes to renew a licence will need to carry out a tax check. The tax check is designed to determine whether a licence applicant is appropriately registered for tax.  The licensing body (typically a local authority or government agency) will have to obtain confirmation from HMRC that the applicant has completed the check before being able to consider the renewed licence application.

2.3. In order to place only minimal additional requirements on licensing providers and customers, the tax check will be facilitated through a HMRC digital service. For the majority of customers, this will ensure that checks can be carried out swiftly and securely; allowing them to be directed to appropriate sources of further support regarding their tax affairs, where necessary. The digital service conforms with government accessibility standards and HMRC also provides support for customers who require digital assistance. For most people, the tax check should only take a few minutes and for those who are unable to complete their tax check online, a tax check can also be completed via HMRC’s helplines.

2.4. Conditionality won’t force anyone to register with HMRC unless they’re already obliged to do so. If the licence applicant is already registered with HMRC as they should be, this will be a straightforward online check each time they renew their licence.

2.5. HMRC has developed the conditionality process through consultation with stakeholders which is set out in more detail in the remainder of this section. Most consultation respondents have supported HMRC’s efforts to level the playing field in this way.

Conditionality will place 2 key obligations on licensing providers

2.6. Licensing providers will signpost first-time applicants to HMRC guidance about their potential tax obligations and obtain confirmation that the applicant is aware of the guidance before considering the application (this could be achieved through a declaration on the application form).

2.7. Where the application is not a first-time application, the licensing body must, before considering the application, obtain confirmation from HMRC that the applicant has completed a tax check. The outline process for the tax check is set out below.

First-time applications

2.8. A tax check will be required to support all applications made by individuals, companies, and partnerships, except for first-time applications.

2.9. A first-time application is one for which an applicant:

• hasn’t previously held the kind of licence for which they are now applying
• did have such a licence, but it expired a year or more before the current application

2.10. Most people making first-time applications will not have held a licence before and will not have commenced trading at the time when they make their application. It would not, therefore, be appropriate to require them to carry out a tax check to support that application. Directing them to information about tax would, however, encourage them to think about potential future tax obligations from an early stage in the life cycle of their business.

2.11. The one year look back also means that where schemes do not have a formal renewal process, applicants will still need to complete a tax check if their activity is ongoing. It also brings into scope anyone who takes a small break in their licenced activity.

2.12. Before the application can be considered, the licensing body must:

• signpost the applicant to HMRC guidance about tax compliance
• tell the applicant about HMRC’s information powers

2.13. The applicant must give the licensing body confirmation that they have made themselves aware of the content of the guidance. The licensing body may not consider the application until it has received that confirmation.

Tax checks

2.14. Any application that is not a first-time application must be supported by a tax check, unless a safeguard applies as below.

Applicant actions

2.15. An applicant will complete a tax check by using the online system provided by HMRC for that purpose. As part of the tax check, HMRC will ask for identifying information which could include the applicant’s name, date of birth, National Insurance number or company registration number. HMRC will also ask for information about their licensed activity and how any income is earned from that activity to enable HMRC to check that the applicant has complied with their obligation to notify their liability or chargeability to income tax or corporation tax where such an obligation applied.

2.16. We recognise that not all licence applicants need to register with HMRC to declare their income. Applicants who are employees only, or do not have an obligation to notify chargeability will be able to say so.

2.17. The tax check is simple and quick to complete online however, HMRC recognises that not everyone will be able to complete the tax check online. To support these customers, HMRC operates a telephone service for those who are unable to complete their tax check online and has additional support available for those who need it.

2.18. A typical applicant journey is as follows:

• licence applicant receives their renewal reminder from the licensing body
• licence applicant logs into the digital service and completes the tax check. The service will ask the applicant simple questions about the licence being renewed and their tax affairs
• once the licence applicant has answered the relevant questions and their statements are checked against HMRC systems, the tax check is completed
• HMRC digital service provides the applicant with a code to confirm completion of the tax check, which is provided to the licensing body with the licence application

Licensing body actions

2.19. Before it can consider the application, the licensing body must obtain confirmation from HMRC that the applicant has completed a tax check.

2.20. A typical licensing body journey is as follows:

• licensing body receives a licence application for consideration
• licensing body logs into the HMRC digital service to view the confirmation that the applicant has completed the tax check
• the licensing body considers the application

Safeguards

2.21. Where the applicant is unable to complete their tax check, or the licensing body was unable to obtain confirmation of completion of the tax check for 5 days due to an HMRC failure, safeguards will ensure that the licence application process can continue without undue delay.

2.22. More broadly, a key aim of the policy is to ensure that applicants are able to complete a tax check quickly and easily, and those who need to come forward and declare a liability are able to do so without facing barriers to trade. Previous consultation has focused on ensuring that sufficient safeguards are in place to meet these aims. Through the current consultation, HMRC is keen to establish whether any alternative or additional safeguards are necessary to meet those aims in the context of licensing within the UK.

Changes to the tax check process for applicants

2.23. The tax check is designed in this way because the licences in scope of the initial implementation were required to be obtained before any activity could begin.

2.24. However, this isn’t always the case when considering broader regulated activity and some approvals target activities which are not specific to a particular trade sector. Someone applying for a licence for the first time (for example as a waste carrier) may have been active in their trade sector for a considerable period of time before commencing a new activity which bought them into scope of waste regulation.

2.25. For certain licences, it may be appropriate to require all applicants to complete a tax check, even if they are applying for the first time. The government is considering whether to require applicants for certain licences where there is a reasonable expectation that a business could have been trading before being in scope of a licensing scheme.

Question 1: Should the government require first time applicants to complete a tax check when applying for specific licences where it is appropriate do to so? If so, which licences, permits, approvals or registrations in the sectors discussed in this consultation should it apply this to?

Changes to the digital service for licensing bodies

2.26. As set out earlier in the consultation, licensing providers are currently required to get confirmation from HMRC that a tax check has been completed using a digital service provided by HMRC. This is currently done on a case-by-case basis and suits the licences in scope which have a significant number of checks undertaken by teams within those licensing bodies.

2.27. While this process works for the existing licences in scope of tax conditionality, it may not be suitable for different regimes which process high volumes of customers with automated checks.

2.28. To enable conditionality to be applied to regimes which rely on automated processing, HMRC will build an automated option into its existing digital service. This will enable licensing providers to incorporate the verification that a tax check has been completed into their digital application forms and get a response in real time.

2.29. If a licensing body was to adopt the automated service a typical user journey would be:

• the applicant receives their renewal reminder from their regulatory body
• the applicant uses the existing HMRC digital service to complete a tax check as described in paragraph 2.18
• the applicant starts their application process on their licensing providers digital application service for the relevant licence in the usual way
• the digital application service asks the applicant for their tax check code
• the applicant enters their tax check code
• the digital application service validates the tax check code with HMRC’s systems
• the applicant proceeds with the rest of the application and submits it to their regulatory body which processes it in the usual way

2.30. If the digital application service is unable to validate the tax check code with HMRC’s systems, HMRC’s system will return an appropriate error code. The application service will use the error code to give the appropriate guidance to the applicant on how to correct the problem and invite them to enter a valid tax check code.

Question 2: Would licensing bodies who process taxi and scrap metal licences currently in scope of tax conditionality adopt this process if it was offered? If so, would it reduce your administrative overhead and by how much?

3. Extending tax conditionality to new sectors

Introduction

3.1. This chapter sets out options for extending tax conditionality to new public sector licensing or registration schemes. It identifies several regulatory areas that the government believes would be appropriate and seeks feedback on the proposals.

3.2. The government has taken account of the results of HMRC’s previous consultations on conditionality in identifying these licences. Those earlier consultations set out a number of principles that HMRC should use to identify suitable licences (or services). These principles were endorsed by the majority of respondents.

3.3. The government believes tax conditionality should apply throughout the UK where similar and appropriate licensing requirements exist, and it is proportionate to require a tax check.

3.4. Building on the outcomes of the first consultations, the following regulatory areas are likely to be suitable to introduce tax conditionality:

• waste
• animal welfare
• transport

Waste

3.5. The UK generated 191.2 million tonnes of total waste in 2020^{[footnote 4]}, with most waste being collected by private contractors. This sector includes many small and medium-sized enterprises and covers a range of activity, from transportation of waste through to brokering and dealing, treatment, processing, and disposal. It is estimated that the cost of waste crime is over £1 billion (England only) impacting both legitimate businesses through lost revenue and the wider public through lost taxation and costs from cleaning up abandoned waste, as well as blighting local communities and damaging the environment. Waste regulation is a devolved matter.

3.6. The waste sector can be vulnerable to hidden economy activity and the government has already introduced tax conditionality to some waste related activities focusing on the collection and processing of scrap metal.

3.7. The government wants to explore the opportunity for broadening its application of tax conditionality to more regulated activities within the waste sector, specifically the 2 regimes highlighted below. It believes applying tax conditionality could help strengthen existing regulation and make it harder for a small number of dishonest businesses to undercut the compliant majority.

3.8. In addition to the activities highlighted below, the government is also interested in hearing from stakeholders regarding other regulated activities and their fitness for tax conditionality.

Waste carriers, brokers and dealers

3.9. A waste carrier is a person that transports waste in the course of carrying out business activities and is required to register as a waste carrier.

3.10. A waste broker arranges for other businesses’ waste to be handled, transported, disposed of, or recovered and is required to register as a waste broker.

3.11. A waste dealer is a business that buys and sells waste or uses an agent to buy and sell waste and is required to register as a waste dealer.

3.12. The waste management sector is regulated differently according to which nation within the UK a registration is required. Depending on the limits and conditions set out by the devolved administration, some licences are operated on a tier system. The government believes the application process for waste carriers, brokers and dealers aligns well with conditionality as it is applied across the UK.

3.13. In England, the Environment Agency (EA) has responsibility for regulating the waste management sector and the requirements to register as a waste carrier, broker or dealer are set out in the Control of Pollution (Amendment) Act 1989 and the Waste (England and Wales) Regulations 2011.

3.14. The Department for Environment Food and Rural Affairs (DEFRA) consulted on reforms to this regime as it applies in England and published a response to this consultation in October 2023. The response document confirmed that the regulation of waste carriers, brokers and dealers will move into a new environmental permitting regime. Under the new system, as well as terminology change from waste carriers, brokers, and dealers to waste transporters and controllers, those involved in the sector will be required to apply for an environmental permit or register an exemption, both of which will need to be renewed every 3 years. The changes are expected to come into effect during 2025.  We intend to apply tax conditionality to the new regime once it has taken effect.

3.15. The Northern Ireland Environment Agency (NIEA) has responsibility for regulating the waste management sector in Northern Ireland and the conditions are set out in the Waste Regulations (Controlled Waste (Registration of Carriers and Seizure of Vehicles) Regulations (Northern Ireland) 1999). The scheme operates a renewal process every 3 years and renewal applies to the upper tier only. The lower tier operates as a perpetual registration.

3.16. The Scottish Environment Protection Agency (SEPA) has responsibility for regulating the waste management sector in Scotland. The legislation that requires those who transport other people’s waste to register with SEPA is the Control of Pollution Act 1989. Those who are carrying their own waste can register as a Professional Collector and Transporter of Waste, which is prescribed in the Waste Management Licensing (Scotland) Regulations 2011. The scheme currently operates a renewal process every 3 years and this applies to both the upper and lower tiers. In January 2024 the Scottish Government and SEPA consulted on proposals to move all waste authorisations into a new integrated authorisation framework between 2024 and 2026. We intend to apply tax conditionality to current regime or to the new regime depending on timing and suitability to work with conditionality principles.

3.17. In Wales, Natural Resources Wales (NRW) has responsibility for regulating the waste management sector.  The requirements for registration of waste carrier, broker and dealers are set out in the Waste (England and Wales) Regulations 2011.  In Wales the upper tiers are required to renew every 3 years. There is no requirement to renew lower tier licences.

3.18. The application of conditionality to waste carriers, brokers and dealers where suitable renewal mechanisms exist could help to strengthen existing regulation and make it harder for a small number of dishonest businesses to undercut compliant businesses in the sector. It could also act as a further deterrent to criminal activity in the waste sector and support a number of improvements to existing regulation in the sector that government has announced over recent years.

Waste exemptions

3.19. A waste exemption is a waste operation that is exempt from requiring an environmental permit. These exemptions require the operator to meet the limits and conditions of the exemption to ensure their waste operation does not harm the environment or human health. Depending on the limits and conditions set out by the devolved administration, some exemptions operate a tier system for simple or complex exemptions.

3.20. In England, the Environment Agency is responsible for registering most waste exemptions which are prescribed in the Environmental Permitting (England and Wales) Regulations 2016. Waste exemptions registration lasts 3 years.

3.21. The Northern Ireland Environment Agency is responsible for registering waste exemptions in Northern Ireland. The Waste and Contaminated Land (Northern Ireland) Order 1997 and The Waste Management Licensing Regulations (Northern Ireland) 2003 provides for exemptions from waste management licensing. Waste exemptions must be renewed every one or three years.

3.22. In Scotland, the Scottish Environment Protection Agency are responsible for registering waste exemptions which are prescribed in the Waste Management Licensing (Scotland) Regulations 2011. Simple exemptions do not expire, and complex exemptions must be renewed each year.

3.23. In Wales, Natural Resources Wales is responsible for registering most waste exemptions which are prescribed in the Environmental Permitting (England and Wales) Regulations 2016. Waste exemptions must be renewed every 3 years.

3.24. Local authorities in some administrations are responsible for a small number of waste exemptions which must be registered with the local authority where the operation will be carried out.

3.25. The government believes the application of tax conditionality to waste exemptions could strengthen existing regulations and make it more difficult for a small number of unscrupulous businesses who abuse the system, and level the playing field for compliant businesses.

3.26. Conditionality may also provide an additional deterrent to criminal activity and support many of the improvements made to existing regulation in recent years.

Question 3: Do you have any comments about, or evidence of, the suitability of expanding the use of tax conditionality to waste regulatory regimes?

Question 4: Are there any features of the waste regulatory regimes or processes used by the providers administering them, which are incompatible with tax conditionality, or the policy model outlined in chapter 2?

Question 5: Where appropriate renewal mechanisms don’t exist, should regulators direct those registering to information about their tax obligations?

Animal welfare licensing

3.27. Animal welfare licensing covers a range of activities and is intended to protect animals and the wider public from harm. Animal welfare regulation is a devolved matter but there are similarities in how it operates across the UK.

3.28. The government wants to explore the opportunity to introduce tax conditionality into animal welfare licensing where appropriate. The activities highlighted below can be vulnerable to the hidden economy.  The government believes applying conditionality to the animal welfare licensing sector, specifically within the licensing of activities involving animals could help to strengthen existing regulation and make it harder for a small number of dishonest businesses to undercut compliant businesses in the sector.

3.29. Recent external research^{[footnote 5]} estimates that the UK dog population has risen from 8.3 million in 2011 to 10.6 million in 2024.  The survey reports that 51% of UK adults own a pet, with an estimated 10.6 million pet dogs and an estimated 10.8 million pet cats. Increases in ownership numbers for both dogs and cats has generated increased demand for dog breeding, animal boarding establishments and pet selling, all of which require a licence, and the government believes these licences are a good fit for tax conditionality.

3.30. In addition to the sectors highlighted, the government is also interested in hearing from stakeholders regarding other activities currently regulated or have the potential to be regulated in the future and their fitness for tax conditionality.

Dog breeding

3.31. Across the UK, commercial dog breeders and /or dog breeders who meet a threshold based on the number of litters produced and/or puppies sold in any 12-month period require a licence. Anyone who breeds dogs at any premises or carries on a business of breeding dogs for commercial sale must obtain a licence. However, the number of litters produced to require a licence varies across the UK.

3.32. In England, the Animal Welfare (Licensing of Activities Involving Animals) (England) Regulations 2018 (LAIA) sets out the conditions for dog breeding licensing in England. Anyone breeding dogs and advertising a business of selling dogs and/or anyone producing 3 or more litters of puppies in any 12-month period who sells any of the puppies should be licensed.

3.33. In Northern Ireland, the Welfare of Animals (Dog Breeding Establishments and Miscellaneous Amendments) Regulations (Northern Ireland) 2013 sets out the conditions for dog breeding licensing in Northern Ireland. Anyone breeding, advertising, or supplying 3 litters or more in a 12-month period or who also advertises a business of breeding or selling requires a licence.

3.34. In Scotland, the Animal Welfare (Licensing of Activities Involving Animals) (Scotland) Regulations 2021 sets out the conditions for dog breeding licensing in Scotland. Anyone breeding 3 litters or more in a 12-month period requires a licence.

3.35. In Wales, the Animal Welfare (Breeding of Dogs) (Wales) Regulations 2014 sets out the conditions for dog breeding licensing in Wales. A licence is required by anyone who runs a business that breeds and sells dogs or breeds 3 or more litters in a year and sells any of the puppies.

Animal boarding establishments

3.36. An animal boarding establishment is a business that offers accommodation for other people’s dogs or cats and includes kennels and catteries that are run commercially.

3.37. In England, the legislation for the keeping of boarding establishments for animals is set out in The Animal Welfare (Licensing of Activities Involving Animals) England Regulations 2018.

3.38. In Northern Ireland, boarding establishments are required to obtain a licence under the Welfare of Animals Act (Northern Ireland) 1972; licencing conditions for the keeping of boarding establishments for animals are set out in the Animal Boarding Establishments Regulations (Northern Ireland) 1974.

3.39. In Scotland and Wales, the legislation for the keeping of boarding establishments for animals is set out in the Animal Boarding Establishments Act 1963.

Pet Selling

3.40. A pet seller is defined as an individual or business selling animals as pets in the course of a business, including keeping animals with a view to them being sold or sold as pets.

3.41. All licences require an inspection of the premises where the animals are kept prior to a licence being granted and can be issued for up to 3 years. Holders of dog breeding licences may not require a pet selling licence if they are only selling the dogs they breed. The length of the licence is determined by the risk rating applied to the business at the time of inspection.

3.42. In England, Scotland and Wales animal licensing regulations are broadly similar. In Northern Ireland pet sellers are regulated under the pet shop licensing regime.

3.43. In England the regulations for pet selling are set out in the Animal Welfare (Licensing of Activities Involving Animals) (England) Regulations 2018.

3.44. In Northern Ireland pet shops are required to obtain a licence under the Welfare of Animals Act (Northern Ireland)1972. Further regulation is contained within Petshop Regulations (Northern Ireland) 2000.

3.45. In Scotland, the legislation for pet selling is set out in the Animal Welfare (Licensing of Activities Involving Animals) (Scotland) Regulations 2021.

3.46. In Wales, the legislation for pet selling is set out in the Animal Welfare (Licensing of Activities Involving Animals) (Wales) Regulations 2021.

Other activities

3.47. In addition to the activities highlighted above, the government is seeking views on which other activities in scope of animal welfare licensing are vulnerable to hidden economy activity and should also be considered for tax conditionality. For example, the keeping or training of animals for exhibition.

3.48. The government is also interested in hearing views on the application of tax conditionality to other similar activities. For example, a number of local authorities have implemented professional/commercial dog walking licensing schemes covering specific public spaces with the intention of improving standards in the sector.

Question 6: Do you have any comments about, or evidence of, the suitability of expanding the use of tax conditionality to animal welfare licensing? If so, which activities should conditionality apply to?

Question 7: Are there any features of the animal welfare licensing or processes used by licensing providers in administering them, which are incompatible with tax conditionality, or the policy model outlined in chapter 2?

Transport sector

3.49. The UK government has already introduced tax conditionality into licences needed by drivers in this sector, these are:

• England and Wales – driving taxis and private hire vehicles and carrying out a business as a private hire operator. This was introduced in April 2022
• Northern Ireland – driving taxis. This was introduced in October 2023
• Scotland - driving taxis and private hire cars and operating a booking office. This was introduced in October 2023

3.50. This was well received with stakeholders reporting the tax check is easy to use.

3.51. Pre-implementation feedback from representative groups such as local authority and trade representatives included recommendations that tax conditionality should also apply to specific vehicle licences used in the taxi and private hire sector.

Vehicles in the taxi and private hire sector

3.52. Vehicles used in the taxi and private hire sector require an annual licence to establish that the vehicle is safe and suitable for passengers and other road users. The licence is held by the proprietor responsible for the vehicle, this includes owner drivers, taxi and private hire firms and fleet providers.

3.53. Taxi and private hire vehicle licensing is administered by Transport for London inside London, by the Driver and Vehicle Agency in Northern Ireland and by the local authorities elsewhere across the UK. While licencing is devolved, licencing principles are broadly similar such as each vehicle licence lasting for up to 12 months.

3.54. In England, the Local Government (Miscellaneous Provisions) Act 1976, Metropolitan Public Carriage Act 1869, Private Hire Vehicles (London) Act 1998 and the Plymouth City Council Act 1975 sets out the conditions for taxi and private hire vehicle licensing. In Wales, the conditions for taxi and private hire vehicle licensing are also set by the Local Government (Miscellaneous Provisions) Act 1976.

3.55. In Northern Ireland, the Taxi Licensing Regulations (Northern Ireland) 2015, the Taxi Act Northern Ireland 2008 and the Vehicle Excise and Registration Act 1994 sets out the conditions for taxi and private hire vehicle licensing in Northern Ireland.

3.56. In Scotland, the Civic Government (Scotland) Act 1982 sets out the conditions for taxi and private hire vehicle licensing in Scotland.

3.57. The government is keen to hear if further benefit could be derived from applying conditionality to licences for vehicles used in the taxi and private hire sector in addition to the licences where conditionality already applies. In particular, joining the current regulatory standards, tackling the hidden economy, and supporting a level playing field for the majority of compliant businesses in the sector.

Question 8: Do you have any comments about, or evidence of, the suitability, positive or negative of expanding the use of tax conditionality to vehicles in the taxi and private hire sector in the UK?

Question 9: Are there any features of the licensing regimes which apply to vehicle proprietors used in the taxi and private hire sector or processes used by independent licensing authorities/bodies in administering them, which are incompatible with tax conditionality, or the policy model outlined in chapter 2?

Question 10: Do you have any comments about the proportionality of extending tax conditionality to licences for vehicles in the taxi and private hire sector in addition to the existing licences already in scope of tax conditionality?

Pedicabs in London

3.58. Pedicabs are treated as taxis for the purposes of licensing legislation as it applies in England and Wales outside of London. Therefore, anyone driving a pedicab outside of London is already in scope of the existing tax conditionality which applies to taxi driver licensing.

3.59. However, in London different legislation regulates the taxi and private hire sector and pedicabs are not treated as taxis for the purposes of the Metropolitan Public Carriage Act 1869.

3.60. Due to these regulatory differences pedicabs have been operating in London unregulated for around 30 years and because they are unregulated, it’s not known precisely how many are operating. Estimates suggest between 200 and 900 pedicabs operate on London’s streets.

3.61. The sector is relatively small but the pedicab industry remains the only form of public transport in London which is unregulated. There are concerns that many pedicabs lack appropriate safety standards, participate in antisocial and nuisance behaviour and drivers are not subject to the same stringent checks as other public transport services which protect users of those services.

3.62. It is also highly vulnerable to hidden economy activity. We expect cash transactions are commonplace and the lack of regulation enables participants to hide their incomes from HMRC.

3.63. To address this regulatory gap, at Spring Budget 2024, the Government introduced legislation, Pedicabs (London Act 2024). This gives Transport for London the power to make orders to introduce licensing and regulate the sector and attach penalties to contraventions.

3.64. The government will seek to bring Pedicabs within the scope of the existing tax conditionality policy when the new licensing scheme is introduced in line with how this operates outside of London.

Question 11: Should the government seek to apply tax conditionality to pedicabs in London when licensing is introduced to regulate the activity?

Question 12: Do you have any comments or evidence on levels of hidden economy activity within those who drive pedicabs or operate pedicab businesses in London?

Safeguards and impacts

3.65. This chapter has set out options for extending tax conditionality to several individual sector licensing or registration schemes. As set out in chapter 3, HMRC has a well-established process for both completing and verifying tax checks. HMRC has support channels for those who are unable to complete the tax check online and enable customers to complete the tax check over the phone in real time if the need arises. There are also safeguards in place which prevent the licensing process from being disrupted if the tax check service was unavailable for 5 days or more.

3.66. These processes were developed using feedback from the previous consultations which focused on other licenced sectors. The government is also seeking views on whether any further support or safeguards are required for the licences set out in this chapter.

Question 13: Do you have any comments on the suitability of safeguards outlined in chapter 2 and are there any further safeguards needed in addition to those outlined in chapter 2 for the licences outlined in chapter 3?

Question 14: Do you have any comments about, or evidence of, impacts (positive or negative) of applying tax conditionality to the regulatory regimes set out in this consultation?

Question 15: Are there any licence holders who may need additional support to engage with the tax check and what support do they need?

3.67. This consultation makes the case for introducing conditionality into sectors that are vulnerable to hidden economy where there is an existing licence regime. However, the government also recognises that business innovation and changing consumer demands means that new business sectors are emerging that might require licencing regulation to maintain public safety.

3.68. Tax conditionality has the potential to add additional societal benefits to sectors where opportunities to introduce or enhance licensing regulatory reforms have been identified.

3.69. The government is seeking views on designing tax conditionality where new licensing regimes are introduced or amended. The government is also seeking views on what other sectors of the economy could benefit from strengthened regulatory standards which tax conditionality brings.

3.70. The example below is illustrative of how this could work in practice:

• the government consults on introducing new or amending existing licensing requirements
• the relevant department and HMRC considers whether conditionality could promote tax compliance within the population and if there is a wider benefit to linking the regulation with tax
• tax conditionality is designed into the licensing process from the outset if appropriate

Question 16: What other sectors should the government seek to apply tax conditionality?

Question 17: Should the government seek to apply tax conditionality requirements to new licensing schemes or existing licensing schemes from the outset?

Question 18: Should regulators be required to consider if tax compliance should form part of any new, or changes to existing standards and or administrative processes for business operations?    

Question 19: Should HMRC be more easily able to share information (e.g. to confirm whether a person is appropriately registered for and paying tax) with regulators to help ensure they are an appropriate person to be undertaking the regulated or licenced activity?

4. Assessment of impacts

Exchequer Impact Assessment

Impacts	Comment
Economic impact	This proposal is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families	This measure imposes no new tax obligations but is expected to have an impact on individuals who are required to hold a licence in the relevant sectors. These individuals will need to complete a tax check when applying to renew licences. If individuals do not complete a tax check, the licensing body will be unable to consider their application to renew their licence or permit and their current licence will expire. In these cases, individuals will no longer be licensed in the relevant sector, potentially reducing, or eliminating a source of income. This could have an impact on family formation, stability, or breakdown. To mitigate this, we will prepare clear guidance and work with licensing bodies and industry representative bodies to make individuals aware of the new requirement. New licence or permit holders will also receive education about their tax obligations when applying for their licence for the first time and will be made aware of the tax check at licence renewal. Individuals’ experience of dealing with HMRC is expected to remain broadly the same, as the tax check will be simple to complete every 1 or 3 years.
Equalities impacts	The measure may have a significant impact cumulatively on the identified sectors. We expect it will affect approximately 800,000 businesses who are expected to hold licences in the waste (500,000) and taxi sector (300,000) and between 200 and 900 pedicabs in London. External research on the animal welfare sector shows a substantial increase in dog and cat ownership which has generated demand in breeders and pet sellers. We expect around 17,000 animal welfare licences will be affected by this measure. Businesses will need to use the tax check service to demonstrate whether and how they are registered for tax each time they apply to renew their licence. This will typically take place every 3 years. The existing conditionality measure imposes an estimated average annual net increase in continuing administrative burden of around £0.7 million. This is a cumulative impact, applying across the whole population and it is associated with the time taken by businesses to complete tax checks prior to renewing licences. We expect the administrative burden for this measure to be within a similar range, with the potential for this to be reduced through some streamlining of the measure in implementation. One-off costs will include those associated with familiarisation with the proposal, and we expect these to be negligible. Customer experience is expected to remain broadly the same as the measure does not alter how businesses interact with HMRC. This measure is not expected to impact civil society organisations.
Impact on businesses and Civil Society Organisations	The proposal may have an impact cumulatively. Businesses will need to use the new digital service or via the alternative route provided for digitally excluded customers to demonstrate whether and how they are registered for tax each time they apply to renew their licence. One-off costs will include familiarisation with the proposal. Continuing costs will arise from businesses completing the tax check each time they renew their licence. Businesses’ experience of dealing with HMRC is expected to improve as the tax check will give compliant businesses reassurance that HMRC is directly tackling their non-compliant competitors. It will also assist non-compliant businesses that wish to comply by directing them to support to get their tax affairs right. This measure is not expected to impact civil society organisations. Small and micro business assessment: The majority of businesses affected by this change are micro and small in size. Omitting small and micro businesses from the change would negate the purpose of the measure. The measure is expected to benefit compliant micro and small businesses by preventing non-compliant competitors from gaining a financial advantage. HMRC will ensure that small and micro businesses who may be digitally excluded or need extra support are directed towards additional help, via established HMRC processes.
Impact on HMRC or other public sector delivery organisations	The implementation and delivery of this proposal will incur additional costs for HMRC in the form of IT changes, increased customer contact, work to assure compliance with the new process and funding due to licensing providers for implementation of the policy change. Licensing providers in the UK will incur one-off costs from updating systems, processes and literature and ensuring staff are familiar with the new requirements. There will be a small additional cost to process tax-registration checks. It is not expected that conditionality will lead to an increase in appeals or the volume of cases going to tribunal or judicial review. There is no impact on climate and fuel poverty targets and air quality targets.
Other impacts	Other impacts have been considered and none have been identified. HMRC seeks views from respondents as part of this consultation on any other potential impacts of this proposal.

5. Summary of consultation questions

Question 1: Should the government require first time applicants to complete a tax check when applying for specific licences where it is appropriate do to so? If so, which licences, permits, approvals or registrations in the sectors discussed in this consultation should it apply this to?

Question 2: Would licensing bodies who process taxi and scrap metal licences currently in scope of tax conditionality adopt this process if it was offered? If so, would it reduce your administrative overhead and by how much?

Question 3: Do you have any comments about, or evidence of, the suitability of expanding the use of tax conditionality to waste regulatory regimes?

Question 4: Are there any features of the waste regulatory regimes or processes used by the bodies administering them, which are incompatible with tax conditionality, or the policy model outlined in chapter 2?

Question 5: Where appropriate renewal mechanisms don’t exist, should regulators direct those registering to information about their tax obligations?

Question 6: Do you have any comments about, or evidence of, the suitability of expanding the use of tax conditionality to animal welfare licensing? If so, which activities should conditionality apply to?

Question 7: Are there any features of the animal welfare licensing or processes used by licensing providers in administering them, which are incompatible with tax conditionality, or the policy model outlined in chapter 2?

Question 8: Do you have any comments about, or evidence of, the suitability, positive or negative of expanding the use of tax conditionality to vehicles in the taxi and private hire sector in the UK?

Question 9: Are there any features of the licensing regimes which apply to vehicle proprietors used in the taxi sector or processes used by independent licensing authorities/bodies in administering them, which are incompatible with tax conditionality, or the policy model outlined in

Question 10: Do you have any comments about the proportionality of extending tax conditionality to licences for vehicles in the taxi and private hire sector in addition to the existing licences already in scope of tax conditionality?

Question 11: Should the government seek to apply tax conditionality to pedicabs in London if a licensing scheme is introduced to regulate the activity?

Question 12: Do you have any comments or evidence on levels of hidden economy activity within those who drive pedicabs or operate pedicab businesses in London?

Question 13: Do you have any comments on the suitability of safeguards outlined in chapter 2 and are there any further safeguards needed in addition to those outlined in chapter 2 for the licences outlined in chapter 3?

Question 14: Do you have any comments about, or evidence of, any impacts (positive or negative) of applying tax conditionality to the regulatory regimes set out in this consultation?

Question 15: Are there any licence holders who may need additional support to engage with the tax check and what support do they need?

Question 16: What other sectors should the government seek to apply tax conditionality?

Question 17: Should the government seek to apply tax conditionality requirements to new licensing schemes or existing licensing schemes from the outset?

Question 18: Should regulators be required to consider if tax compliance should form part of any new, or changes to existing standards and or administrative processes for business operations?

Question 19: Should HMRC be more easily able to share information (e.g. to confirm whether a person is appropriately register for and paying tax) with regulators to help ensure they are an appropriate person to be undertaking the regulated or licenced activity?

6. The consultation process

This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:

• Stage 1: setting out objectives and identifying options
• Stage 2: determining the best option and developing a framework for implementation including detailed policy design
• Stage 3: drafting legislation to effect the proposed change
• Stage 4: implementing and monitoring the change
• Stage 5: reviewing and evaluating the change

This consultation is taking place during Stage 2 of the process. The purpose of the consultation is to seek views on the detailed policy design and a framework for implementation of a specific proposal, rather than to seek views on alternative proposals.

How to respond

Please provide responses to this consultation no later than 31 January 2025.

A summary of the questions in this consultation is included at chapter 5.

Responses should be sent by 31 January 2025, by e-mail to isbcehepolicyconsultations@hmrc.gsi.gov.uk or by post to:

ISBC Policy and Strategy,
HMRC,
Room 2/09,
100 Parliament Street,
London, SW1A 2BQ.

Please do not send consultation responses to the Consultation Coordinator.

Paper copies of this document in Welsh may be obtained free of charge from the above address.  This document can also be accessed from HMRC’s GOV.UK pages. All responses will be acknowledged, but it will not be possible to give substantive replies to individual representations.

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

Confidentiality

HMRC is committed to protecting the privacy and security of your personal information. This privacy notice describes how we collect and use personal information about you in accordance with data protection law, including the UK General Data Protection Regulation (UK GDPR) and the Data Protection Act (DPA) 2018.

Information provided in response to this consultation, including personal information,

may be published or disclosed in accordance with the access to information regimes.

These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection

Act 2018, UK General Data Protection Regulation (UK GDPR) and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be

aware that, under the Freedom of Information Act 2000, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HMRC.

Consultation Privacy Notice

This notice sets out how we will use your personal data, and your rights. It is made under Articles 13 and/or 14 of the UK General Data Protection Regulation.

Your data

 We will process the following personal data:

name
email address
postal address
phone number
job title

Purpose

The purpose(s) for which we are processing your personal data is: Tackling the Hidden Economy by Expanding tax conditionality to new sectors

Legal basis of processing

The legal basis for processing your personal data is that the processing is necessary for the exercise of a function of a government department.

Recipients

Your personal data will be shared by us with HM Treasury.

Retention

Your personal data will be kept by us for 6 years and will then be deleted.

Your rights

You have the right to request information about how your personal data are processed, and to request a copy of that personal data.

You have the right to request that any inaccuracies in your personal data are rectified without delay.

You have the right to request that any incomplete personal data are completed, including by means of a supplementary statement.

You have the right to request that your personal data are erased if there is no longer a justification for them to be processed.

You have the right in certain circumstances (for example, where accuracy is contested) to request that the processing of your personal data is restricted.

Complaints

If you consider that your personal data has been misused or mishandled, you may make a complaint to the Information Commissioner, who is an independent regulator. The Information Commissioner can be contacted at:

Information Commissioner’s Office:

Wycliffe House
Water Lane
Wilmslow
Cheshire
SK9 5AF

Phone: 0303 123 1113

email: casework@ico.org.uk

Any complaint to the Information Commissioner is without prejudice to your right to seek redress through the courts.

Contact details

The data controller for your personal data is HMRC. The contact details for the data controller are:

HMRC
100 Parliament Street
Westminster
London
SW1A 2BQ

The contact details for HMRC’s Data Protection Officer are:

The Data Protection Officer
HM Revenue and Customs
14 Westfield Avenue
Stratford,
London
E20 1HZ

email: advice.dpa@hmrc.gov.uk

Consultation principles

This call for evidence is being run in accordance with the government’s Consultation Principles.

The Consultation Principles are available on the Cabinet Office website: Consultation Principles Guidance

If you have any comments or complaints about the consultation process, please contact the Consultation Coordinator.

Please do not send responses to the consultation to this link.

Annex A: List of stakeholders consulted

Department for Environment, Food and Rural Affairs (DEFRA)

Environment Agency (EA)

Department of Agriculture, Environment and Rural Affairs Northern Ireland (DAERA)

Department for Infrastructure Northern Ireland

Scottish Government

Scottish Environmental Protection Agency (SEPA)

Welsh Government

Natural Resources Wales

Department for Transport (DFT)

Annex B: Relevant (current) government legislation

Relevant (current) legislation

The legislation to introduce tax conditionality for applications for licences to drive taxis and private hire vehicles, to operate a private hire vehicle business or deal in scrap metal from April 2022 in England and Wales is contained within Section 125 of the Finance Act 2021 

S.342 of Finance (no. 2) Act 2023 extends tax conditionality legislation to similar licences issued in Scotland and Northern Ireland from October 2023.

Schedule 33 of Finance Act 2021 provides the actions licensing authorities must take before considering an application.

The Scottish Environment Protection Agency (SEPA) consulted in January 2024 on proposals to move all waste authorisations into a new integrated framework and published a summary of responses in August 2024.

1. ‘Tax’ refers to income or corporation tax and being ‘registered’ for tax includes notifying HMRC of liability to tax and delivering tax returns to HMRC as required under the relevant legislation. ↩

2. Finance Act 2021, Schedule 33. ↩

3. Section 342 of the Finance (no. 2) Act 2023. ↩

4. UK statistics on waste produced at a UK level: UK statistics on waste. ↩

5. PDSA animal Wellbeing Report 2023. ↩