Download Submission to the Joint Oireachtas Committee on Jobs, Enterprise

SMALL FIRMS
ASSOCIATION
Submission to the
Joint Oireachtas Committee on Jobs,
Enterprise & Innovation
on the
Black Economy in Small Businesses
April 2013
INTRODUCTION
The Small Firms Association (SFA) is the “voice of small business” in Ireland representing over
7,500 companies and 7 affiliated organisations.
The hidden economy is a bad new story for everyone. It endangers jobs, by diverting spend away
from the legitimate businesses; it offers no protection to the individuals working within the black
economy and it robs the exchequer of much need tax revenue.
Consumers also lose out as counterfeit clothing for example, is rarely of the same quality as the
real item; laundered fuel is damaging to cars and illicit alcohol and fake drugs can kill.
There is always an element of hidden economic activity within any jurisdiction. This is often
increased during times of economic difficulties and high unemployment and this can be clearly
seen by the increase of the black economy activity throughout the EU in 2009.
Due to the nature of this activity, placing an exact figure on the cost to the State of the black
economy is difficult.
Ireland’s hidden economy, according to Fredrich Schneider was estimated at 14% of GDP, (or
half a billion euro each month is generated that the taxman does not have access to) before the
recession. Reports would estimate the figure for the EU to be in the region of 18% of GDP while
in Australia, Canada, Japan, New Zealand and the USA, the figure is quoted as just under 9%.
As the recession continues, the level of black market activity is increase not diminishing.
Organised crime groups are taking advantage of the situation. When this activity reaches a point
where it is impacting on jobs, legitimate businesses and society action must be taken.
Impact on Small Business
The scope, scale and extent of black economy operators poses a very serious threat to the survival
of many registered tax compliant businesses. A cycle of non-payment of taxes increases the
burden on the legitimate economy, which in turn harms competitiveness and drives more into
dependency, raising social costs. The activity also undermines the ability of Government to
collect taxes efficiently and effectively.
It is essential that all companies can compete on a level playing field. Due to reduced overheads
and lack of compliance those who operate within the informal economy have huge competitive
advantages and also distort the operation of a competitive labour market.
A report produced by Retail Ireland in 2012 shows that the exchequer is losing at least €861m a
year as a result of Irish people knowingly, or not, purchasing illegal goods. This is the equivalent
of some 5.7% of PAYE collected.
The SFA 2012 Crime Survey shows that internal fraud is on the increase. Over a three year
period theft of stock has increased by 17%; theft of property has increased by 15% and internal
fraud increased by 7%.
Figures from the Department of Social Protection show that one of the key areas for fraud is
through the Job Seekers Benefit, it is estimated that the net cost is 1.6% of expenditure. During
2012, 11,900 calls alone were received, by the Department specifically relating to working and
claiming benefit. These figures clearly show that the public are not willing to ignore abuse of the
system, when there are individuals, who are suffering as a result of welfare cuts, nor do tax
payers wish to see scare finances being abused – they want action.
Apart from the effect to the economy and the State, workers in the black economy can be among
those least protected in terms of employment law; health or social security benefits and often lose
the opportunity for security or promotion within the workplace.
Convictions
In Ireland at the end of 2011, there were 206 serious tax and customs cases at various stages of
the prosecution process. During this period 497 criminal convictions for excise and customs
offences were record, however of these only 32 custodial sentences were imposed (just over
6.4%).
There needs to be a clear message that “crime does not pay”.
At the heart of any black economy is one simple notion and something that anyone can
understand - dishonesty. The criminal justice response to this dishonesty has to be clear and firm.
It is vital that an adequate policy response is backed by the necessary resources; to bring the
criminals to justice and to protect legitimate businesses and consumers.
Proposed Actions
The SFA is urging the Government to become committed to a solution to the growing problems
which the black economy creates for the small business sector. Due to the scale of the drain on
the economy, more focused attempts to tackle the problem are overdue and given that sometimes
controversial measures are necessary, a European initiative may be required.
We must also ensure that honest taxpayers and businesses do not suffer additional tax increases to
make up for revenue losses incurred due to tax fraudsters and evaders.
There needs to be greater awareness among consumers of the consequences of purchasing
counterfeit, smuggled goods or paying cash to an illegitimate business. This could be achieved
through an awareness campaign which highlights the antisocial nature of informal economy
working, combined with tougher enforcement.
We believe that there is strong business case for resources to be deployed to enhance enforcement
action. While stern penalties apply, a large volume of illegal activity goes undetected. The
courts rarely apply the max fines or custodial sentences.
If individuals are convicted for illegal activity i.e. tax/custom/excise evasion and they are in
receipt of social protection benefits, these benefits should be reduced by the losses the State has
incurred until the amount owed is reimbursed to the State.
An evaluation of the factors which influence taxpayers attitudes to the informal economy should
be undertaken. Reports on the hidden economy indicate that when an economy has a favourable
tax regime that it is more beneficial for the exchequer. When taxes and business costs increase,
there is little incentive to work and a greater incentive to find options to be non compliant.
Reduction in the costs of operating in the formal economy can bring some of the illegal
transactions to the formal sector.
While steps in addressing the black economy have been taken by Revenue and Government
departments, a review of the resource levels engaged in tackling the informal economy and
increase expenditure on training for those engaged in challenging the informal economy, are
required.
Conclusion
While the State and small business are spending billions of Euros on preventive actions on the
black economy and business crime, the incidence, extent, scope and costs associated with the
informal economy are increasing. This alone reflects the societal changes which are taking place
and why it is so important that its prevention and the manner in which we deal with people
dealing within the black economy must change, otherwise our society, the State and businesses
are in serious danger.