All around the world fraud is a big problem. Nobody knows how big because it is a crime hiding beneath the surface of every day life. As a result, estimates of its cost to the economy can never be reliable.
Looking at only tax fraud the estimated levels are unlikley to be correct. In the UK a report in 2010 by the National Fraud Authority puts the level of tax fraud alone at £15.2 billion. This is less than 3 percent of the total annual revenue from tax collected in the UK.
This is unlikely to fully take into account the systematic evasion of tax by the black economy. Consider the hundreds of thousands of small businesses that deal in cash and under declare their earnings. If you are sceptical try visiting a small independant shop. A corner shop or news vendor will do. When you pay the vendor for your coffee or chewing gum, keep an eye out on how he puts the money away. Each sale properly rung into the register resulting in a till roll record will be matched by another that is simply placed into an open cash tray. Consider the times that a tradesman has offered a cash discount. Is there any other reason for doing this than wanting to keep the cash away from his official record of earnings?
Another example of tax evasion is the use by small businesses of self employed staff. For example there are many marketing businesses set up to promote advertisements in various publications, on web sites and on bill boards. A number of telephone sales persons will be used by them and these will be paid on a commission only basis. They have to sort out their own tax. Frequently these workers do not declare their earnings and some even claim benefits as well.
The owners of these businesses turn a blind eye in many cases, and even see the opportunity to evade tax themselves. By putting down a false name or two on the sales list they can draw extra money out of the business apparently as a legitimate cost to pay sales workers but actually take the money tax-free themselves. The construction industry had this problem until the Revenue brought in laws stopping sub contractors being paid without tax being first deducted unless they were properly certified. But similar activity still takes place in other industries.
Tax evasion is endemic in most countries including the UK. If the amount evaded is much more than 3 percent as this article suggests then it is true that we are all paying much more tax than we should.
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Mark Jenner is a Fellow of the Institute of Chartered Accountants in England and Wales, a Certified Fraud Examiner and holds a Masters Degree in Fraud Investigation Management. He works as a forensic accountant and his web site offers informative articles on investigating fraud, fraud prevention and asset recovery together with advice on preventing money laundering. He regularly gives expert accounting evidence as a witness for the fraud regulators.
