Research and analysis

Executive Summary

Published 22 June 2023

1. Introduction

The Hidden Economy is defined as economic activities which are entirely hidden from HM Revenue and Customs (HMRC). This report covers findings from the second wave of research conducted into the Hidden Economy in the United Kingdom (UK). The first wave was conducted in 2015 to 2016 and since then events such as the UK’s exit from the European Union (EU), the COVID-19 pandemic, and longer-term trends of social, political, economic, and technological changes may have affected people’s attitudes and behaviours.

The research provides up-to-date quantitative insights to help with measuring the UK economy and design policies to increase compliance, including:

• the scale of the Hidden Economy

• characteristics of people participating in the Hidden Economy

• the nature of Hidden Economy activities and business practices

• motivations for participating in the Hidden Economy

Fieldwork ran from the 21 July 2022 to 21 August 2022 and was conducted online and over the phone with a probability-based sample of 5,537 people recruited from the NatCen Panel. Respondents were asked about all of their income generating activities, and from their answers we established whether they had any involvement in any Hidden Economy activities. Additional questions were then asked to learn more about participants involved in the Hidden Economy and those activities.

2. The scale of the Hidden Economy

An estimated 8.8% of the UK adult population were identified as participating in the Hidden Economy. When compared with the figure from Wave 1 (4.9%), there appears to have been an increase in the prevalence of those involved in the Hidden Economy since 2015 to 2016.

The proportion of people participating in the Hidden Economy was estimated to be 6.6% after accounting for estimated eligibility for the property and trading allowance schemes and the overall income generated by activities covered by these schemes.

Another 4.8% of the population were identified as being possibly involved in the Hidden Economy, up from 0.6% in 2015 to 2016. However, while there could be several possible ‘real-world’ explanations for this change (e.g. the growth of the gig economy or the impact of COVID-19 on employment), methodological changes from Wave 1 may also have played a role.

4.7% of all people were identified as participating in the Hidden Economy and having an income above the personal tax threshold – a rise from 2.6% measured at Wave 1. However, only 1.1% of the population are estimated to have generated a ‘high’ income (£5,000 or more) from their Hidden Economy activities, a similar level to that recorded in 2015 to 2016.

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).

3. Characteristics of Hidden Economy participants

Participation in the Hidden Economy was split between three key types of behaviour:

• Moonlighters, whose Hidden Economy activity supplements declared activity (65% of the Hidden Economy population)

• Ghosts, who reported that they have not declared any of their sources of income (whether taxable or non-taxable) to HMRC (35%)

• Value Added Tax (VAT) non-registered, businesses that are assumed to have a turnover over the VAT threshold and are not registered with HMRC for VAT (4%)

The majority of those who participate in the Hidden Economy, reported one Hidden Economy activity (83%).

Among those in the Hidden Economy, around half (54%) had a total personal income above the income tax threshold. For most Hidden Economy participants, the Hidden Economy supplemented income from other sources. A Hidden Economy activity was the main source of income for around one in ten participants in the Hidden Economy (12%). Most (56%) Hidden Economy participants reported that an economic activity not in the Hidden Economy was their main income source, whilst a third (32%) stated another source such as a pension, tax credits or state benefits was their main source of income.

4. Nature of Hidden Economy activities and business practices

10% of all economic activities were in the Hidden Economy. Of different types of economic activity, ‘supplementary activities’ (apart from renting) were more likely to be within the Hidden Economy compared to more formal work types:

4.1 Supplementary activities consisting of:

• buying goods to sell (49% of all of these activities are in the Hidden Economy)

• making things to sell (44%)

• casual work (35%)

• self-employed activities (8%)

• renting activities (5%)

• employee activities (2%)

However, activities that were more likely to be within the Hidden Economy were not necessarily the most common activities in the Hidden Economy. This is the case in relation to making things to sell (very likely to be in the Hidden Economy, but not a lot of people engaged in this activity) and paid employee activities (unlikely to be in the Hidden Economy, but a very large number of people are in paid employment):

• buying goods to sell (40% of all Hidden Economy activities)

• casual work (21%)

• making things to sell (14%) (second most likely activity to be within Hidden Economy)

• paid employee (14%) (least likely activity to be within Hidden Economy)

• self-employed (10%)

• rent (any) (2%)

Half (50%) of Hidden Economy activities generated an income below £250, while 12% created no income at all. 21% generated an income above £1,000.

Hidden Economy activities were likely to be:

• temporary: 83% of activities seen as temporary rather than permanent

• part-time: 86% of activities were carried out for fewer than 16 hours per week

• infrequent: 76% of activities were carried out less than once a week

Most participants in the Hidden Economy (91%) did not receive any help or assistance with bookkeeping and tax affairs. 66% of Hidden Economy activities were done without any records, and 41% were paid in cash. 91% of those involved in the Hidden Economy did not participate in any regulatory activities such as having a business bank account, or holding a professional or vocational qualification.

Close friends or family members (45% of activities) and members of the public (45%) represented the largest customer groups for those in the Hidden Economy. Word of mouth or networking was the most common method reported by those in the Hidden Economy used by customers to find them, with 37% of HE activities advertised on social network platforms and 30% operated on online marketplaces.

The majority of Hidden Economy activities (68%), excluding rental activities, were entirely or partly carried out in the participant’s own home.

Motivations for participating in the Hidden Economy

Excluding ‘Other’ reasons (41%), the most common reasons mentioned by Hidden Economy participants for not declaring their activity to HMRC were:

• income being too small, so did not know had to (35%)

• income being too small, so not worth the time (32%)

• income irregular or temporary, so not worth the time (22%)

• income irregular or temporary, so did not know had to (21%)

Around two-thirds (65%) of those involved in the Hidden Economy reported thinking that reporting additional income to HMRC or registering a business for VAT would be difficult. The majority of respondents (78%) in the Hidden Economy stated they were unlikely to move into the Formal Economy within the next 12 months.

Among those involved in the Hidden Economy, knowledge of tax rules varied:

• 85% thought you should register for VAT if their business’ turnover was above the VAT threshold;

• 56% thought if income from all sources is under £12,570, it does not need to be declared to HMRC;

• 47% thought if you are buying and selling things on eBay to make money you should tell HMRC;

• 28% thought if you are already paying tax you do not need to tell HMRC about any other activities as long as the income earned does not take you into the next tax band;

• 18% thought that taxable income from renting properties does not need to be declared.

Participants in the Hidden Economy were more likely to feel that it was acceptable not to declare income that is occasional or a small amount:

• Amounts up to £500, 74% acceptable;

• Occasional income, 67% acceptable;

• Income from buying and selling on the internet, 46% acceptable;

• Amounts up to £2,500, 38% acceptable;

• Amounts up to £10,000, 15% acceptable.

Similar numbers among those within and outside the Hidden Economy thought it was common for businesses and individuals to find ways to pay as little tax as possible.

If caught by HMRC, the majority of participants in the Hidden Economy (88%) thought they would get fined, with 32% thinking they would go to prison and 30% get a warning. Most participants (73%) did not have a particular source of information on the consequences of being caught, beyond their own thinking.