Did you hear Jon on BBC Radio Merseyside on 9 May? He was interviewed by Tony Snell on Friday’s breakfast show.
The topic was cash in hand payments – a survey earlier in the week claimed 50% of people have paid cash in hand to get a cheaper price, and that this is costing HMRC over £2bn every year.
Tony Snell needed an expert accountant and, obviously, thought of MJF Accountancy!
Here’s what Tony and Jon chatted about.
Tony: Now how often do you pay for something in cash? Obviously if you go to the shop and get some bread and milk or the post office you are going to pay in cash most of the time that way but I’m talking about building work, getting the electric sorted out, a bit of plumbing, gardening or the gutters. A survey suggests more than half of us have paid in cash. Has a tradesman offered discounts if you pay them with cash? Is that morally wrong? I’m not having a pop at builders; this is just general cash in hand question. Is it morally wrong to do that? Should we take some responsibility for making sure our hard earned taxed cash ends up in the treasury?
Earlier on we spoke to Sameena Thompson from the National Federation of Builders. This is what she told me: ‘The national federation of builders is calling for the government to reduce VAT from 20% to 5% because we believe that this would solve more than several problems, it would solve the cash in hand issue, it would actually provide protection to consumers because they would have the paperwork that goes with jobs paid for properly, it would get rid of rogue traders as they would have no incentive to appeal to you and I to get a job a little bit cheaper because the 5% VAT rate would meant that consumers can spend that little bit more on improving their homes.’
Well, joining me now in the studios is Jonathan Davies from Liverpool firm MJF Accountancy. How many small businesses take cash in hand; hide cash earnings to avoid paying ‘Tax’? Can we put a number on that?
Jon: I think it’s difficult to put a number on it; obviously there is a big difference between taking cash, which is a perfectly valid payment, and cash in hand to keep it off the books. I think, to be honest, it’s a very small percentage actually keep it off the books
Tony. Yes and, of course as you said, it’s not illegal to pay someone in cash. Some people may not have a bank account and want to pay in cash. Is the responsibility to the person you hand the cash to? Surely it’s their responsibility to say you’ve given me £100 and £25 or £30 of that I’m putting to one side for the tax man?
Jon: Exactly. If you go into, for example, Tesco over the road from the studio and pay cash, your responsibility has ended there. It’s very similar if you are using a tradesman or any other service – it’s not just tradesman you can pay cash to
Tony: You do get hefty discounts though and we’ve all done it. This is the real world we’re living in here and if somebody comes and says “I’m going to fit a back door for you it’s going to cost you £1000 but if you pay me cash I can do it for £600”, you’re going to take the £600, aren’t you?
Jon: Well, I think that’s the moral dilemma for people and again that doesn’t necessarily mean they are not declaring the tax. Sometimes there is an early payment discount – the same as you may pay more if you pay for something over a period of time, However it is for you then to ask the question – what’s the cash discount for?
Tony: It’s a real minefield accountancy isn’t it, whether you’re a sole trader, Ltd company or whether you’re a global company and you’ve set up business here? Now you know where I’m going with this question now don’t you? You can look at the books, I mean figures are figures whether you’re bringing in £20,000 or £2 billion. You know figures are figures. Can you tell from somebody’s books that they are pulling a bit of a fast one here?
Jon: It very much depends, I mean what we can do and what an accountant can do and, more importantly what HMRC can do is actually look at your books compared to other people in a similar sector. If yours look incredibly different that may lead to questions being asked
Tony: Well, taxi drivers for example. Let’s talk about cabbies this morning. HMRC will know on average how much a cabbie is going to earn over the space of 12 months or so, so all of a sudden if you say “I’ve been working x amount of days and I’ve only earned £4,000 this year” when everyone else has pulled in £20,000 they are going to look at that, aren’t they?
Jon: Yes, and HMRC particularly over the last couple of years have set up a number of task forces and they have focused on specific industries at specific times. So they may spend 6 months looking at restaurants in the North West, 6 months looking at taxi drivers in London and they have been picking people out and then looking at them in quite a lot of detail and looking at exactly that kind of thing – “well, we know you were open from those hours to those hours and the figures don’t quite stack up” and then looking at the records behind that
Tony: The government says cash in hand payments have cost the treasury £2 billion, how can this be? If I’m saving (and lets use the scenario of the back kitchen door again, if I’m saving £400 on a back kitchen door, that £400 is in my pocket, I’m going to spend it somewhere else, I’m going to spend it in the supermarket or going out for a meal and that’s going to be taxed so the money is going to go back into the treasury in some other aspect.
Jon: For HMRC the rules are very straight forward. There should be tax paid by everyone on the income they make. For people to make their own decision that “actually it will all be going round and coming back elsewhere” is going against the rules
Tony: The VAT question – if a builder comes to me (and again I’m not just having a pop at builders –we’re just using a builders scenario) and says “this is the job plus VAT”, how do I know that 20% VAT is going to go to HMRC? They may just be saying it’s “plus VAT” but they may not be VAT registered and that money is going to be slotted – how do we know?
Jon: The simplest step is that you do not know initially if someone is VAT registered. If their sales in a year are less than £81,000, they don’t need to be VAT registered but, if they are and are adding VAT on, there should be an invoice and it should have a VAT number which, if you wish to do so, you can actually check is valid and, therefore, they are correct in adding VAT
Tony: So straight away that could save you 20% on your bill if they’re not registered for VAT
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Added by Jon Davies