Need Not Greed

Pilot a Voluntary Disclosure Scheme (Examples from USA and UK)
Introduce a voluntary disclosure system modelled on the Offer in Compromise (OIC) scheme in the USA. The OIC programme enables revenue departments to accept a compromise on previously undeclared earnings where this is in the interests of both parties. This approach encourages the transition from informal to formal working by establishing in advance the terms and conditions of the agreement. Voluntary disclosure increased 400% when Revenue Canada recently piloted a similar initiative.

The HMRC / DWP 2006 Hartlepool project was partially based on this model. Though the way in which the Hartlepool project was designed and delivered has much to be desired. We think that it should be tried again but significantly refined and led by a non-government organisation in partnership with relevant government agencies. A secondment to Community Links would be a useful way to establish and run such a pilot project.

Pilot a Customer Formalisation Vouchers Scheme (An example from Belgium)
Using vouchers to encourage employers to utilise formal labour is increasingly popular in industrialised nations. Different schemes exist, but the common theme is that customers buy vouchers to pay for domestic services. The redeemable value of the voucher is more than the cost price, with government paying the difference. This subsidises the difference between the cost of informal and formal labour, increases tax revenue and reduces the number of people claiming benefits.

Such an initiative has been adopted in Belgium over the last decade, with Local Employment Agencies allowing long-term unemployed people the opportunity to retain the money they earn alongside their benefits. These agencies found that of the 37 million vouchers sold between 1994 and 1999, almost two-thirds were to private households. In addition, 44% of jobs carried-out on the scheme had previously been undeclared work.

Introduce targeted schemes at specific business / enterprise sectors
Policy should target employers and attempt to stimulate the labour markets available to people in deprived areas. There are certain key industries where more low-paid informal work takes place such as construction, home maintenance and repairs (internal and external), and caring. One of the main features of these industries is that work is contracted and sub-contracted. For example, work for employers such as local councils, large supermarkets, or hospitals can end up being carried out informally. In certain industries, employers use subcontracting and notional self-employment to avoid paying taxes, and rights responsibilities towards their employees, drive down wages, rendering minimum wage policy ineffective. They should be more tightly monitored.

Specific industries known to employ more people in low-paid informal work should be targeted, to support them to create more economically viable formal opportunities (and economic and business models) for both themselves as employer and the employees. Trade unions have a role in monitoring and addressing informal activity too. Achieving this in the construction and domestic consumer services would deal with 85% of all informal paid work (SBC, 2004).

The construction industry, as an example:
Although tax evasion or non-compliance is often cited as the main reason for entering the informal economy, the following reasons have all contributed to the informality of the sector: the widespread use of cash payments in the industry; the high cost of labour; contractual arrangements have become less accountable; the increased tax burden; and the disincentives of penalties to return to the formal sector such as tax repayments with added interest.

93% of the UK’s construction industry is made up of companies that employ less than 7 people. The cost of excessive bureaucracy and regulations which are fixed costs affect smaller companies the most. This is a particularly important feature to why so many construction companies operate informally. (Jewell et al, 2006)

‘Home Services Scheme’ (An example from Denmark)
The two most prevalent sectors within the informal economy, home maintenance and other domestic services (e.g. gardening, childcare) account for the vast majority of informal work, so it would sensible to target these two areas of work. The Home Services Scheme in Denmark, was adopted permanently after a successful three year pilot in the mid-90s. The scheme involved businesses registering with an agency to provide household maintenance and renovation. The government then reimbursed 40% of the labour costs. In 1998 one in eight households were making use of the scheme at least five times per year and over the three year pilot, 3,700 full-time equivalent jobs were created.

‘Me plc’ (An example from Germany)
A German scheme, ‘Me plc’, helps unemployed people start-up their own self-employed business (either one person or a family venture) and receive a tapered subsidy equivalent to 50% of their unemployment benefit over the first three years of operation. In 2003, 93,000 people registered on the scheme, far exceeding the expected take-up of 20,000 people to claim back 40% of the costs of registered home service providers - introduce vouchers to pay for formal domestic labour, through which the government effectively subsidises the difference between the cost of informal and formal labour. This will reduce the number of benefits claimants and increase tax revenue.