Disguise: Cash-only transactions and the need to lessen them

They help tax evasion; promotion of plastic money necessary.

LONDON: Coming as a surprise, despite numerous laws against tax avoidance, the United Kingdom government is still relatively lenient on small and medium size enterprises (SMEs) when it comes to tax evasion and VAT fraud.

It is no secret that a vast majority of SMEs in the UK, especially those owned by ethnic minorities, are operated as ‘cash only’ merchants and hence likely to be innovative with their accounts to optimise tax benefits.

There are numerous otherwise very successful retailers and food outlets (like halal meat shops, restaurants, ice cream parlours, bakers and confectioners) that accept only cash as a means of payment.

The likes of Afters – a chain of ice cream parlours in London – does not accept credit and debit cards and in fact displays cash-only signs in a number of their outlets. There have been instances where Afters evicted customers from their premises even for enquiring why they do not accept plastics as a means of payment.

There have been numerous claims that huge amount of undeclared cash is transferred abroad by migrant communities usually to buy properties in their countries of origin. While a welcome source of foreign remittances by the home countries, cash economy continues to be one of the hardest issues for tax agencies worldwide.

Realising the possible link between tax evasion and terrorism financing, European Union adopted a tougher law in May 2015. According to the newly adopted fourth anti-money laundering directive (AMLD), the ultimate owners of companies will have to be listed in central registers in EU countries, open both to the authorities and to people with a “legitimate interest”, such as investigative journalists. This new AMLD aims to step up the fight against tax crimes and terrorist financing by making it easier to trace transfers of funds.

Tax evasion

Against the backdrop of such developments, it is surprising that the UK government remains one of the most lenient regimes on anti-money laundering and tax evasion practices by SMEs. There are thousands of businesses being run by members of different ethnic groups across the country, where customers have to face a lot of inconvenience in terms of finding an ATM and taking cash out before buying goods from such retailers.

In this age of plastic and digital money, insistence on cash only as a mode of payment by such retailers has a strong tax-evading motive. Not only is it inconvenient and more expensive for customers, it also incurs a bigger loss to the exchequer in terms of VAT fraud and tax evasion.

Tax evasion occurs when someone carrying on a trade or running a business does not pay tax on some or all of their profits including keeping business ‘off the books’ by accepting or paying cash.

A case in point is a restaurant located in the Seven Kings area of East London. As a cash-only restaurant, it has a privately owned ATM on its premises. Customers are asked to take cash out of the ATM (which incurs a transaction fee of £1.60). This means a meal that otherwise may cost £10 actually cost £11.60 – an increment of 10.6% over the menu price.

As the customers pay cash, the restaurant owner can easily disguise the transaction and not report (or at least underreport) the sale to the tax authorities. For every £10 unreported sale, the government loses £2. Furthermore, the loss to the tax authorities will be even higher if the business actually reports less profit and hence pays less than its actual liability of corporate profit tax.

Those who believe that business owners are the only beneficiaries in this scenario are at best naïve. According to Timur Kuran, a renowned economist at Duke University, religious scholars also indirectly benefit from this type of sin activities. There is a potential misuse and abuse of charity money, especially if it is not properly regulated.

Given that the tax evasion is prevalent especially in ethnic business communities, a significant proportion of money saved through tax evasion ends up in the hands of unregulated charities and informal religious groups.  Since informal ethnic and faith-based charities often fall outside regulatory scrutiny, they are vulnerable to money laundering and terrorism financing and are often a major source of illicit funds for international terrorist networks.

THE WRITER IS AN ECONOMIST AND A PHD FROM CAMBRIDGE UNIVERSITY

Published in The Express Tribune, July 27^th,  2015.

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