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HMRC have not fully assessed the risks to tax from different sectors and groups in the hidden economy, MPs have claimed.
A new report from the Committee of Public Accounts believes that the Revenue could be losing more than £2 billion a year as a result of around two million people not declaring their earnings.
Areas of risk identified by the document include self-employed builders and decorators, individuals who trade on the internet, and buy-to-let landlords.
The committee goes on to note that the taxman has detected about 30,000 hidden economy cases a year since 2003-04: a detection rate of around 1.5%. The amount of money raised from cases has, however, increased by 13% in real terms.
The report also acknowledges that HMRC have made notable attempts to detect undeclared income through greater use of data matching techniques and the tax evasion hotline (which received more than 120,000 calls in 2006-07).
But progress in investigating cases has been slower than the department has expected, with additional tax assessments of only £2.6 million gained out of a planned £32.5 million.
The MPs' paper criticises the Revenue for most commonly either imposing penalties of less than 100% on tax evaders or waiving the fines. In 2006-07, the department imposed penalties of £5 million, amounting to around 3% of the tax identified — although prosecutions rose to 69 cases in the same year.
The chairman of the Committee of Public Accounts, Edward Leigh MP, said that HMRC are 'apparently making little ground in [their] efforts to diminish the cash-in-hand culture'.
He added: 'The chances of being caught are very slight. For those who are caught, the penalties imposed are usually relatively trifling'.
The committee's paper recommends that the Revenue 'bring[s] together information it currently holds in a structured way to identify the highest risks and gaps in coverage where further analysis is needed'.
It is also suggested that the Offshore Disclosure Facility be adapted for other risk areas, such as the home repair and improvement sector, to obtain data on groups of potentially non-compliant people or businesses, and then the details can be used to secure voluntary disclosures.
'HMRC must also do much more to publicise both the benefits of joining the formal economy and the potentially serious consequences of not doing so,' Edward Leigh remarked.
'And if such publicity is to have any effect, then it must be backed up by resolute action by the department to complete more investigations, apply the full range of new penalties available and ramp up the number of prosecutions.'
In response to the MPs' report, the Revenue insisted that it is 'committed to deterring and challenging those who do not pay their fair share [of tax]'.
'As the National Audit Office said earlier this year, the department is detecting more unpaid tax through new ways of working, such as the Offshore Disclosure Facility, which has already brought in over £400m in unpaid tax,' said an HMRC spokesperson.
