Clampdown on tax avoidance should extend to hidden economy, Treasury minister says

The row over aggressive tax avoidance shows no signs of dying down. HMRC has vowed to shut down a scheme through which three members of Take That - Mark Owen, Howard Donald and Gary Barlow - are reported to have saved millions of pounds in tax (Rex Features)

The practice of paying workmen "cash in hand" to enable them to dodge income tax or VAT was condemned as "morally wrong" yesterday by a Treasury minister.

David Gauke's comments came as he signalled fresh action to tackle tax avoidance by the super-rich.

But the Exchequer Secretary made clear he also had the less wealthy in his sights as he attacked the widespread use of cash to settle bills from plumbers, builders and domestic staff. Mr Gauke told reporters: "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." Asked directly if he disapproved of the practice, he replied: "Yes, I think it's morally wrong."

He added: "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."

The extent of the "hidden economy" is by definition hard to quantify. The Government has estimated it loses about £4bn a year from people working or trading "off the books".

The organisation Tax Research UK says the loss to the Treasury from the "hidden economy" could be as high as £46bn – enough to pay for the annual defence and law and order budgets combined, or to more than halve the annual current deficit.

Dave Hartnett, the Permanent Secretary at HM Revenue and Customs, has said that people who pay builders or cleaners in cash cannot complain about austerity measures.

"Tax provides the funding to run the country: hospitals, schools and everything else," he said.

"Every time someone pays cash in order not to pay VAT, the nation gets diddled."

The HMRC has already threatened to target families who pay nannies cash in hand. According to the most recent estimate, there are 30,000 nannies in Britain.

There may, however, be one benefit of the "hidden economy" – some experts believes that its existence is helping to lower dole queues as young adults opt to work cash-in-hand rather than register unemployed.

Mr Gauke also confirmed moves, in a speech to the think-tank Policy Exchange yesterday, to "name and shame" companies which fail to disclose the use of tax-avoidance schemes. The people behind them will be forced to take personal liability for promoting them.

The debate over tax was ignited when Jimmy Carr was criticised for participating in a scheme that allows members to pay tax of as little as 1 per cent.