This “grey” economy, where economic activities occur without taxation, remains a significant global issue. Estimates suggest that up to one-fifth of economic activity worldwide occurs in the shadows. While the allure of lower prices may initially benefit consumers, the long-term costs can be substantial, affecting businesses, government revenue and consumer protections.
Our new research within UK service sector businesses in the East Midlands indicates that these quick transactions also have many unseen costs.
Cash-in-hand payments can be convenient for consumers and businesses. From a customer’s perspective, paying cash often reduces the cost of services. For businesses, especially small and medium-sized enterprises (SMEs) operating on thin margins, cash transactions provide funds without the delays of invoicing.
Our research highlighted how consumers can inadvertently pressure businesses into the informal economy by pushing for discounts for cash payments that bypass tax and regulations. In doing so, rules are often sidestepped, as one business owner confirmed:
"You do feel pressure from customers, which drives all prices down … The only way I can keep cutting costs would be to either use cheaper materials, not pay everything (income tax and VAT), or employ people off the record."
In some cases, consumers directly request things such as VAT exemptions. As one business owner noted, consumers often ask to “lose the VAT”. Another business owner said that if an invoice shows VAT listed separately, many customers immediately want it to be taken off.
The research showed that consumers often view VAT as a “business tax” that doesn’t concern them. Another business owner noted that when customers ask to “lose the VAT” they are effectively asking business owners to commit VAT fraud.
Market conditions intensify the impact of these demands. When faced with stiff competition from businesses that bypass all regulations, one business owner felt they must cut prices or risk losing consumers to fully informal competitors.
"When there’s no other work, you have to take it … It’s a survival choice rather than greed."
Persistent requests for cash discounts can create a perceived social acceptance that avoiding tax and other regulations is normal. Yet over time, this erodes the legitimacy of businesses that play by the formal rules.
Business owners also noted that as cash-in-hand transactions became more common, their reputation with suppliers and financial institutions were more challenging to maintain. Businesses that rely on cash payments can have difficulty securing funding or investment, as they don’t have a verifiable financial history.
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For the full article by Danny Buckley visit the Conversation.