I thank the committee for the invitation to present to it today. I represent ISME, the independent body for small and medium-sized enterprises. The committee is well aware of the black or hidden economy. Suffice to say, it is made up of everything from criminal racketeering right across to nixers, illegitimate dole claims and undisclosed employment. It covers a wide spectrum of problems that affect many small and medium-sized businesses such as unfair competition. There will always be an element of a hidden or shadow economy in any jurisdiction. However, it does seem to be exacerbated during recessions and high unemployment. The small and medium-sized business sector contends that much of the competition that we face comes from the delivery of services for undeclared cash which includes home improvements and decoration, waste disposal, gardening services, furniture removal, etc. The nixer culture is very much alive and well. There has been a definite shift towards the cash-only shadow economy.
As I have said, this is particularly evident in the construction and maintenance sectors, where the incidence of jobs being done for cash without any VAT being paid has increased. This completely undercuts legitimate companies, many of which have reported that potential clients are demanding to pay off the books in order to save VAT. When individuals or companies carry out undeclared services for cash, they undermine the ability to compete of legitimate businesses that are operating above board. As legitimate providers are more often than not registered for VAT, that alone leads to a price differential.
As we are all aware, racketeering and rogue operators are profiting massively from illegal sales of cigarettes and diesel. Such activity costs the Exchequer many millions of euro. Newsagents and convenience store owners can contact ISME, through our helpline, when a consignment of illegal cigarettes arrives. Their sales drop through the floor in such circumstances. Ironically, this leads to the closure of local businesses and the loss of local jobs. If the locals have their cheap cigarettes, they wonder who cares. The same people will be the first to complain when they cannot buy a bottle of milk in a local convenience store. They usually fail to see the connection, which is why an awareness campaign is needed.
Over the years, I have done a number of interviews about the black economy. The first or second question I am always asked is why those who are in trouble because they have a lack of cash to spend should be blamed for asking for things to be done off the books. That question has to be addressed. I will come back to it.
The figures used to quantify the cost of the black economy vary from place to place. We have worked with Professor Schneider of Linz University to try to measure the black economy. I have included in my presentation the figures he has come up with in recent years. He suggests that the black economy amounts to approximately 16% of GDP, which would mean that approximately €25 billion is being used in the black economy at the moment. If 20% of that figure were subject to a tax take, the value of the black economy to the Exchequer would be between €5 billion and €5.5 billion. That does not take account of what happens when an illegitimate business undercuts a legitimate one and puts it out of business.
I would like to run quickly through six hypotheses which are based on the work done by Professor Schneider. Each of them can be taken as a given. The higher the tax burden, the bigger the shadow economy. The lower the tax morale - people's willingness to pay fair tax - the bigger the shadow economy. The higher the level of unemployment, the bigger the shadow economy. The more business activities are regulated by red tape, the bigger the shadow economy. The higher the self-employment quota - the number of self-employed people as a proportion of the working population - the bigger the shadow economy. The lower the quality of the institutions measured by the rule of law, the bigger the shadow economy. All other things being equal, these six factors will work together to create a black economy. None of them on its own will create a black economy.
I would like to comment on the type of policy conclusions we can draw from what I have said. In addition to the burden of indirect tax and personal income tax, which the Government can directly influence through its policy actions, self-employment and unemployment are two important driving forces of the shadow economy. The level of awareness of the general public can be added to that. The Government can control unemployment through economic policy, or it can try to improve the country’s competitiveness and thereby increase foreign demand. While the impact of self-employment on the shadow economy is less or only partly controllable by the Government, the Government can create an incentive to encourage business people and entrepreneurs and thereby help self-employment, which contributes in the overall context. We need to accompany those actions with strengthening of the institutions and increasing people's tax morale, or willingness to pay tax. That has to be taken into account.
As I mentioned earlier, many people are increasingly resentful of their role models who have fiddled, evaded or failed to pay their proper tax while citizens on reduced wages have suffered income tax increases, the roll-out of the universal social charge and the introduction of a household property tax. These people are angry and are refusing to deal with service providers unless they agree "no tax" or "cash-only" prices. If this problem is to be solved, both the buyer and the seller in the black market have to be identified and penalised. That is part of the awareness campaign I have mentioned. We need a high-profile campaign to educate the public on the economic damage caused by the black economy, including the impact it has on their localities and on the provision of public services. This is important. A successful insurance campaign, which was introduced in 2002 and is continuing, uses the slogan "He's putting his hand in your pocket" to try to reduce the number of false claims that were made. The introduction of something like that in this sector would be worthwhile.
As an organisation, our position on the black economy is that a reduction of the shadow economy can be achieved using various channels that the Government can influence. The main challenge is to bring shadow economy activities into the official economy, so that goods and services are still produced and provided at an economic price while the Government gets additional taxes and social security contributions and unfair competition is reduced. The hidden economy has substantial and far-reaching implications for employment, government taxes and services and general society. There is a need to raise awareness and highlight the costs to society. The attitudinal and cultural factors that cause many people to turn a blind eye to illicit activities have to be changed. A whole-of-government commitment to combating this problem must be demonstrated. An interdepartmental approach to developing and promoting an awareness campaign could deliver a clear and comprehensive message.
We are proposing various actions. An awareness and advertising campaign should be developed to communicate the issues and highlight the positive impact of a reduction in hidden economy activity. The current work of the hidden economy working group should be promoted and supported. A draft version of the "Good Citizens" report on illicit activities is being pushed by the working group at the moment. We hope the final report will be available fairly soon. The introduction of a tax and social welfare amnesty would allow individuals to come forward for a defined period and legitimise their tax earnings status on the basis of forgiving the past and wiping the slate clean. In the event of fraudulent or illicit activities being subsequently detected, penalties and consequences should be enhanced considerably, with a zero tolerance approach being taken. That would facilitate those who have the potential to maintain a business in legitimising themselves. It would remove unfair competition and level the playing field for many small businesses that are trading legitimately. The current taxation and social welfare system should be reviewed to ensure the tax wedge - the difference between being gainfully employed and claiming social benefits - is changed in some way. Our economic circumstances will dictate that one. Perhaps tax incentives could be offered to home owners who use tradespeople who are verified as being tax compliant. That would help to reduce the number of black economy workers.
At present, anyone who is taxing a commercial vehicle is allowed to do so at a cheaper rate if it is being used for commercial purposes.
There is no formal mechanism in place to validate the legitimacy, so a person can simply say: "I have a business and I need to tax this van, but I want it done at the cheaper rate". If we could introduce a mechanism which ensures the information provided to gardaí on the goods-only declaration is validated as a matter of course, this would cut out many of these issues. As we all know, many of the services that are being provided in the black economy are provided by people with commercial vehicles, so this would help.
On the issue of illicit tobacco, we have seen many initiatives. There needs to be increased awareness among retailers of the hotline established by the Revenue Commissioners to manage expectations and of the confidential nature of that service. To have container scanners at Irish ports where the volume and frequency of container traffic justifies the investment would certainly be an additional bonus with regard to the illicit trade in tobacco and other illicit goods.
Obviously, harsher judicial penalties should be imposed on those caught operating in the black economy. However, there is no need to bring in new legislation or new penalties as those in place at present are probably sufficient.
We need to encourage compliance at the earliest stage when a person is setting up a business. Given all the issues that hit an entrepreneur when setting up a business, tax issues are often perceived as onerous and complex, and are forgotten about in the rush to get new business. As a consequence, businesses can inadvertently become involved in illicit activities in the early stages and perhaps get into bad habits. We should encourage compliance at an early stage and, in this regard, the Revenue Commissioners should restart the visits they used to make to start-ups, based on risk assessment. In addition, the Revenue guide should be made available to more start-up businesses. One of the ways of doing this would be to take the registrations for VAT and regard those as a trigger point where this would be announced to the entrepreneur. Making all of that information more accessible to budding entrepreneurs will help to drive down the black economy, particularly inadvertent entry into the black economy. We need to rebrand many of the guides and bring them into a "Start right" initiative. We should use the county enterprise boards, business innovation centres and enterprise agencies to encourage start-ups and perhaps integrate the "Start right" guide as part of start-your-own-business courses. Those are the 12 different aspects we would encourage the committee to consider.
