Paying a builder or cleaner in cash, allowing them to evade VAT or income tax, will result in even deeper Government cuts to public services. That is the message from the most senior tax collector at Her Majesty’s Revenue and Customs (HMRC).

In an interview with “The Daily Telegraph” (27 January), Dave Hartnett, Permanent Secretary for Tax, said people who contribute to the cash economy cannot then complain about austerity measures.

“Tax provides the funding to run the country - hospitals, schools and everything else,” he said. “Every time someone pays cash in order not to pay VAT, the nation gets diddled”. Mr Harnett added that householders have a duty to ensure that other people do not evade paying their share of tax.

Official recognition by HMRC that cash-in hand building work denies legitimate income to the Treasury has been welcomed by the Builders Merchants’ Federation (BMF).

Paying cash to cowboy builders puts customers at unnecessary risk from shoddy, dangerous or incomplete work that means extra spending to put botched projects right afterwards.

The BMF believes the Government has a golden opportunity with the forthcoming Green Deal to tackle the problem - and create jobs and growth. The BMF wants the Chancellor of the Exchequer to use his Budget Statement on 21 March to announce two measures to help merchants and their suppliers and customers boost trade sales.

1. Simplifying and clarifying existing VAT rules and rates because they are complex, confusing, and do not favour green improvements.

BMF question the logic on what should attract a reduced rate because, for instance:

  • installing insulation = 5% reduced rate, but double-glazing or low-emissivity glass = 20%
  • central heating & hot water system controls = 5% installing energy-efficient boiler = 20%.

Most SMEs do not know existing VAT rules and rates on incidental works. It is very unlikely their clients will know either. These are the very same people the Government wants to take up the Green Deal.

2. Extending 5% VAT to Repair, Maintenance & Improvement Work

The easiest way to encourage Green Deal uptake would be to reduce VAT where specific actions to improve the energy performance of homes and workplaces are completed. A 5% VAT rate already exists for some energy-saving measures. Extending this will entice individuals and businesses to commission works when they modify, renovate buy or sell property (the so-called trigger points).

The BMF believes it is perverse to apply a 5% rate on energy consumption but the 20% standard rate for energy conservation. The 5% rate ought to apply to both.

In the interview, Mr Hartnett gave a stark warning ahead of the new tax year in April. He said tax inspectors are preparing to crackdown on certain groups - notably tens of thousands of cash-in hand builders. This follows earlier campaigns aimed at plumbers and other self-employed persons which the HMRC claims brought in an extra £500 million in tax since 2007.