Oireachtas Joint and Select Committees
Tuesday, 16 April 2013
Joint Oireachtas Committee on Jobs, Enterprise and Innovation
Impact of Black Market on Small Businesses: Discussion
I welcome Mr. Mark Fielding, chief executive officer, ISME, and Ms Avine Mcnally, acting director, and Mr. A. J. Noonan, chairman, Small Firms Association, to the committee’s discussion on the impact of the black economy on small businesses.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.
I ask Mr. Fielding and Ms Mcnally to make their opening statements.
Mr. Mark Fielding:
I thank the committee for the invitation to present to it today. I represent ISME, the independent body for small and medium-sized enterprises. The committee is well aware of the black or hidden economy. Suffice to say, it is made up of everything from criminal racketeering right across to nixers, illegitimate dole claims and undisclosed employment. It covers a wide spectrum of problems that affect many small and medium-sized businesses such as unfair competition. There will always be an element of a hidden or shadow economy in any jurisdiction. However, it does seem to be exacerbated during recessions and high unemployment. The small and medium-sized business sector contends that much of the competition that we face comes from the delivery of services for undeclared cash which includes home improvements and decoration, waste disposal, gardening services, furniture removal, etc. The nixer culture is very much alive and well. There has been a definite shift towards the cash-only shadow economy.
As I have said, this is particularly evident in the construction and maintenance sectors, where the incidence of jobs being done for cash without any VAT being paid has increased. This completely undercuts legitimate companies, many of which have reported that potential clients are demanding to pay off the books in order to save VAT. When individuals or companies carry out undeclared services for cash, they undermine the ability to compete of legitimate businesses that are operating above board. As legitimate providers are more often than not registered for VAT, that alone leads to a price differential.
As we are all aware, racketeering and rogue operators are profiting massively from illegal sales of cigarettes and diesel. Such activity costs the Exchequer many millions of euro. Newsagents and convenience store owners can contact ISME, through our helpline, when a consignment of illegal cigarettes arrives. Their sales drop through the floor in such circumstances. Ironically, this leads to the closure of local businesses and the loss of local jobs. If the locals have their cheap cigarettes, they wonder who cares. The same people will be the first to complain when they cannot buy a bottle of milk in a local convenience store. They usually fail to see the connection, which is why an awareness campaign is needed.
Over the years, I have done a number of interviews about the black economy. The first or second question I am always asked is why those who are in trouble because they have a lack of cash to spend should be blamed for asking for things to be done off the books. That question has to be addressed. I will come back to it.
The figures used to quantify the cost of the black economy vary from place to place. We have worked with Professor Schneider of Linz University to try to measure the black economy. I have included in my presentation the figures he has come up with in recent years. He suggests that the black economy amounts to approximately 16% of GDP, which would mean that approximately €25 billion is being used in the black economy at the moment. If 20% of that figure were subject to a tax take, the value of the black economy to the Exchequer would be between €5 billion and €5.5 billion. That does not take account of what happens when an illegitimate business undercuts a legitimate one and puts it out of business.
I would like to run quickly through six hypotheses which are based on the work done by Professor Schneider. Each of them can be taken as a given. The higher the tax burden, the bigger the shadow economy. The lower the tax morale - people's willingness to pay fair tax - the bigger the shadow economy. The higher the level of unemployment, the bigger the shadow economy. The more business activities are regulated by red tape, the bigger the shadow economy. The higher the self-employment quota - the number of self-employed people as a proportion of the working population - the bigger the shadow economy. The lower the quality of the institutions measured by the rule of law, the bigger the shadow economy. All other things being equal, these six factors will work together to create a black economy. None of them on its own will create a black economy.
I would like to comment on the type of policy conclusions we can draw from what I have said. In addition to the burden of indirect tax and personal income tax, which the Government can directly influence through its policy actions, self-employment and unemployment are two important driving forces of the shadow economy. The level of awareness of the general public can be added to that. The Government can control unemployment through economic policy, or it can try to improve the country’s competitiveness and thereby increase foreign demand. While the impact of self-employment on the shadow economy is less or only partly controllable by the Government, the Government can create an incentive to encourage business people and entrepreneurs and thereby help self-employment, which contributes in the overall context. We need to accompany those actions with strengthening of the institutions and increasing people's tax morale, or willingness to pay tax. That has to be taken into account.
As I mentioned earlier, many people are increasingly resentful of their role models who have fiddled, evaded or failed to pay their proper tax while citizens on reduced wages have suffered income tax increases, the roll-out of the universal social charge and the introduction of a household property tax. These people are angry and are refusing to deal with service providers unless they agree "no tax" or "cash-only" prices. If this problem is to be solved, both the buyer and the seller in the black market have to be identified and penalised. That is part of the awareness campaign I have mentioned. We need a high-profile campaign to educate the public on the economic damage caused by the black economy, including the impact it has on their localities and on the provision of public services. This is important. A successful insurance campaign, which was introduced in 2002 and is continuing, uses the slogan "He's putting his hand in your pocket" to try to reduce the number of false claims that were made. The introduction of something like that in this sector would be worthwhile.
As an organisation, our position on the black economy is that a reduction of the shadow economy can be achieved using various channels that the Government can influence. The main challenge is to bring shadow economy activities into the official economy, so that goods and services are still produced and provided at an economic price while the Government gets additional taxes and social security contributions and unfair competition is reduced. The hidden economy has substantial and far-reaching implications for employment, government taxes and services and general society. There is a need to raise awareness and highlight the costs to society. The attitudinal and cultural factors that cause many people to turn a blind eye to illicit activities have to be changed. A whole-of-government commitment to combating this problem must be demonstrated. An interdepartmental approach to developing and promoting an awareness campaign could deliver a clear and comprehensive message.
We are proposing various actions. An awareness and advertising campaign should be developed to communicate the issues and highlight the positive impact of a reduction in hidden economy activity. The current work of the hidden economy working group should be promoted and supported. A draft version of the "Good Citizens" report on illicit activities is being pushed by the working group at the moment. We hope the final report will be available fairly soon. The introduction of a tax and social welfare amnesty would allow individuals to come forward for a defined period and legitimise their tax earnings status on the basis of forgiving the past and wiping the slate clean. In the event of fraudulent or illicit activities being subsequently detected, penalties and consequences should be enhanced considerably, with a zero tolerance approach being taken. That would facilitate those who have the potential to maintain a business in legitimising themselves. It would remove unfair competition and level the playing field for many small businesses that are trading legitimately. The current taxation and social welfare system should be reviewed to ensure the tax wedge - the difference between being gainfully employed and claiming social benefits - is changed in some way. Our economic circumstances will dictate that one. Perhaps tax incentives could be offered to home owners who use tradespeople who are verified as being tax compliant. That would help to reduce the number of black economy workers.
At present, anyone who is taxing a commercial vehicle is allowed to do so at a cheaper rate if it is being used for commercial purposes.
There is no formal mechanism in place to validate the legitimacy, so a person can simply say: "I have a business and I need to tax this van, but I want it done at the cheaper rate". If we could introduce a mechanism which ensures the information provided to gardaí on the goods-only declaration is validated as a matter of course, this would cut out many of these issues. As we all know, many of the services that are being provided in the black economy are provided by people with commercial vehicles, so this would help.
On the issue of illicit tobacco, we have seen many initiatives. There needs to be increased awareness among retailers of the hotline established by the Revenue Commissioners to manage expectations and of the confidential nature of that service. To have container scanners at Irish ports where the volume and frequency of container traffic justifies the investment would certainly be an additional bonus with regard to the illicit trade in tobacco and other illicit goods.
Obviously, harsher judicial penalties should be imposed on those caught operating in the black economy. However, there is no need to bring in new legislation or new penalties as those in place at present are probably sufficient.
We need to encourage compliance at the earliest stage when a person is setting up a business. Given all the issues that hit an entrepreneur when setting up a business, tax issues are often perceived as onerous and complex, and are forgotten about in the rush to get new business. As a consequence, businesses can inadvertently become involved in illicit activities in the early stages and perhaps get into bad habits. We should encourage compliance at an early stage and, in this regard, the Revenue Commissioners should restart the visits they used to make to start-ups, based on risk assessment. In addition, the Revenue guide should be made available to more start-up businesses. One of the ways of doing this would be to take the registrations for VAT and regard those as a trigger point where this would be announced to the entrepreneur. Making all of that information more accessible to budding entrepreneurs will help to drive down the black economy, particularly inadvertent entry into the black economy. We need to rebrand many of the guides and bring them into a "Start right" initiative. We should use the county enterprise boards, business innovation centres and enterprise agencies to encourage start-ups and perhaps integrate the "Start right" guide as part of start-your-own-business courses. Those are the 12 different aspects we would encourage the committee to consider.
Ms Avine Mcnally:
I thank the committee for the opportunity to attend. I will not go over the points Mr. Fielding has made. We are here to speak on behalf of the Small Firms Association, SFA, which represents more than 7,500 companies and seven affiliated organisations, mainly small businesses based throughout Ireland.
The hidden economy is bad news for everyone. It is bad news for jobs and diverts spending away from the legitimate businesses that are trading, and it is bad news for the individuals working within the black economy, who are probably the least protected workers in the workforce. It also robs the Exchequer of much-needed tax revenue. Another issue is that consumers also lose out, although this is a point we often miss. For example, counterfeit goods are rarely of the same quality, laundered fuel is damaging to vehicles and illicit alcohol and fake drugs can have many harmful effects on individuals.
The point has been made that there is always an element of a hidden economy within any jurisdiction and this often increases during times of economic difficulty. Ireland is not alone in this, as has been seen throughout many European countries, particularly when the recession bit in Europe in 2009. Due to the nature of this activity, it is obviously difficult to get an exact figure. As Mr. Fielding noted, Professor Friedrich Schneider is the economist who has done most work in this area, and his January 2013 report estimated the Irish figure at some 14% of GDP, whereas the European average is in the region of 18% of GDP. We estimate this works out at approximately €6 billion per year, so approximately €500 million is generated each month within the black economy to which the taxman does not have access. While the figure for the EU is 18% of GDP, for countries such as Australia, Japan and New Zealand the figures are approximately 9%, which suggests some countries are more advanced in the steps and approach they have taken in dealing with this area.
The scope, scale and extent of the black economy poses a very serious threat to the survival of many registered, tax-compliant companies. The cycle of non-payment of taxes increases the burden on the legitimate economy, which in turn can affect competitiveness in small businesses and drives more people into dependency, thus raising social welfare costs. This activity clearly undermines the ability of Government to collect taxes efficiently and effectively. At this time, we believe it is essential that all companies should be able to play on a level playing field. Due to the reduced overheads and lack of compliance, those who operate within the informal economy have huge competitive advantages, which distorts the reality of the competitive labour market and trading market small businesses currently face.
In 2012, a report from Retail Ireland suggested the Exchequer is losing approximately €861 million a year because of Irish people knowingly or unknowingly purchasing illegal goods. Retail Ireland estimated this is the equivalent of 5.7% of the PAYE collected, which is a staggering figure. The Small Firms Association's crime report showed that we must also consider the area of fraud. There has been a massive increase in internal fraud in the past three years as well as an increase in theft of cash and property. While people may be helping themselves for their own benefit, it must be assumed much of this stock is moving into a black, hidden economy.
Figures from the Department of Social Protection show that one of the key areas for fraud is through jobseeker's benefit, where it is estimated the net cost to the Exchequer is 1.6% of expenditure. We are beginning to see people's tolerance for this type of activity become less strong than it may have been in the past, and people are certainly not turning as much of a blind eye. According to the Department, almost 12,000 calls were received in 2012 specifically relating to people who were thought to be working and claiming benefit. These figures clearly show that the public is not willing to ignore abuse of the system or see the public finances being abused, particularly when individuals are suffering as a result of welfare cuts. Apart from the impact on the economy and the State, we have to remember that workers in the black economy are among those least protected in terms of employment legislation and health and other social benefits.
Before I hand over to our chairman, who will talk the committee through some of our proposed actions, we must also consider our approach to this issue. At the heart of any black economy is one very simple notion that anyone can understand - namely, dishonesty. The clear message coming from the Judiciary has to be that crime does not pay. The figures from the Revenue Commissioners show there were 206 serious tax and customs cases at various stages of prosecution in Ireland in 2011. During this period, 497 criminal prosecutions for excise and customs offences were recorded. One might say that is quite a number, but one must remember that the level of convictions was just over 6%. There has to be a message that crime does not pay and that the criminal justice response to this dishonesty is 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 who rely on that structure.
I will pass over to our chairman, Mr. A. J. Noonan, who will discuss some of the SFA's proposed views and actions in this regard.
Mr. A. J. Noonan:
The SFA is urging the Government to become committed to a solution to the growing problems that 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 fraudsters and evaders.
There needs to be greater awareness among consumers of the consequences of purchasing counterfeit and smuggled goods and paying cash to illegitimate businesses. This could be achieved through an awareness campaign highlighting the anti-social nature of the informal economy, combined with tougher enforcement. We will keep coming back to the theme of tougher enforcement.
There is a strong business case for resources to be deployed to enhance enforcement action. While stern penalties apply, a large volume of illegal activity goes undetected. As Ms Mcnally previously testified, the courts rarely apply the maximum fines or custodial sentences. If individuals in receipt of social protection benefits are convicted of illegal activity, that is, tax, customs or excise evasion, these benefits should be reduced by the value of the loss incurred by the State until the amount owed is reimbursed to it.
An evaluation of factors influencing taxpayers' attitudes towards the informal economy should be undertaken. Reports on the hidden economy indicate that when an economy has a favourable tax regime, it is more beneficial for the Exchequer. When taxes and business costs increase, there is little incentive to work; there is a greater incentive to find options to be non-compliant. A reduction in the cost of operating in the formal economy could bring some of the illegal transactions to the formal sector. While steps to address the black economy have been taken by Revenue and Departments, a review of the resources engaged in tackling the informal economy and increased expenditure on training for those engaged in challenging the informal economy are required. As we called for a social welfare amnesty about three years ago, I completely concur with Mr. Fielding. It is vital that people are given a chance to make a fresh start, but if they do not do so, the penalties should be severe.
While the State and small businesses are spending billions of euro on preventive actions relating to the black economy and business crime, the incidence, extent and scope of costs associated with the informal economy are increasing. This alone reflects the societal changes taking place and why it is so important the manner in which we deal with people operating in the black economy must change; otherwise, our society, the State and businesses are in serious danger.
I thank the committee for its time and invite questions from it.
I thank Mr. Noonan. I thank all three representatives for their presentations and proposed actions. I should have said at the start that we had decided to take on this issue as a project this year to come up with a range of solutions prior to the budget to put pressure on the Government to introduce necessary changes. It was on foot of Senator Mullins and Deputy Calleary raising the issue last year that we decided to give it a big push. We held public hearings on the issue in Waterford and Kilkenny and will cover counties Mayo and Galway next week. I hope we will cover further counties in May and June and meet members of ISME, the SFA and other groups to get a feel of what needs to be done on the ground. A range of suggestions being brought forward. The delegates have presented some new ones today which are very clear. Our hope is that in early autumn we will compile a report with recommendations for the various Departments involved because we recognise this is a cross-departmental issue to which we need to bring a focus to help the members of ISME and the SFA and the economy in general. We must provide a forum for this issue to push it on. I thank the delegates for their help today in facilitating that objective and giving us their ideas. I will now take questions from members. Owing to Dáil proceedings, we must finish around 3 p.m. I will start with Deputy Calleary who will be followed by Senator Quinn and Deputy Lyons.
I thank the representatives of the two organisations for coming. If any committee is able to offer the Minister for Finance €500 million per month, that is what it comes down to. One can talk about percentages, but Professor Schneider's analysis comes down to a figure of €500 million per month, which is a relatively conservative figure. That is how serious the problem is.
In respect of the burden we put on businesses, we are crucifying legitimate businesses through regulations, yet the delegates seem to agree that nothing or very little is being done on the enforcement side. Will they speak about that issue? Do countries that share a land border and have different tax arrangements, be they for fuel or other items, take specific enforcement measures, particularly in the case of fuel and other goods? What would be different about an awareness campaign? I know Mr. Fielding has said the figure tends to rise as the economy gets weaker, but if one looks at the Schneider analysis, the level always seems to be around 14.5% or 15%. Throughout the so-called boom times, it did not seem to shift significantly below that percentage. If people are getting something that is cheap, do they actually care? How would an awareness campaign make any difference in that regard?
The delegates favour a social welfare amnesty. What would be the result in terms of revenue gained for the State and how would it work? Would someone receive a fine and slap on the hand and be told not to do it again? Would he or she pay all or part of the debt? How many might be in this net? I agree with Mr. Fielding about the tax wedge, which is a serious issue. Unfortunately, we will probably not have time today to discuss that issue, but we might return to it.
I return to the figure of €500 million per month. It is ridiculous to think we will not employ perhaps 50 to 60 people in Revenue and the Department of Social Protection to collect that kind of money. We will pursue this issue.
I thank all of the delegates for coming today and enlightening us as much as they have. I have a friend in the United States with a large grocery store who was caught leaving the country with a suitcase full of money. Apparently, he operated 16 checkouts but only 15 of them were reported; the authorities did not know about the other one and he ended up with a sentence of four years in jail. When the garlic scam took place this year, there was an outcry when the man who had admitted he had done it received a sentence of six years. When Mr. Noonan talks about tough enforcement, I wonder whether the country is willing to take such tough enforcement measures. How do the delegates feel about the matter, assuming there is tough enforcement, in which case some of their own members will be found to have misbehaved in various ways?
It is interesting to hear Deputy Calleary talk about having extra staff. A regime has been introduced in France whereby inspectors stand outside various places and insist on seeing a receipt. If a customer does not receive a receipt or does not have it with him or her when the inspector requests to see it, he or she is found to have broken the law, in addition to the retailer. To what extent are we ready for this? We have a tradition in Ireland of not regarding tax evasion as a very serious offence.
Once again, we hear about a tax amnesty. I am a great believer in tax amnesties, which have worked very well in the past. However, every time one introduces a tax amnesty, one encourages someone to think he or she might get away with it because there will be another. What are the speakers' views on that issue? I did not quite understand the suggestion of a tax incentive for homeowners. Will the speakers give us a further insight into that suggestion?
I completely empathise with the speakers. It is a tough one. I am a little confused about some of the suggestions made. In respect of the social welfare amnesty, is there any evidence that such an amnesty works and, if so, where? In respect of advertising campaigns, I am very familiar with the one involving the guy with the mask on his face who is making a false insurance claim. I get it, but I am not somebody who would have gone down that road in the first place. What research is available to suggest such a campaign works? The other television campaign that is conducted all the time concerns the television licence. I am sick and tired of the ridiculous advertisements involving the use of talking pigeons. If they are effective, that is great, but can somebody please tell me whether the research backs this up?
That is a good point. I am not here to say the speakers' ideas are wrong; rather, I am trying to see which one we should be recommending. Obviously, it would be silly of me to recommend something if my opinion was different. What concrete evidence is available that television campaigns work? Are more people now paying for television licences than before, or it is costing more to run these advertisements? The same question applies to the insurance fraud campaign.
Does it cost more to run that particular advertisement? I really like some of the proposals but a cultural change is needed in Ireland, one that extends far beyond these particular issues. I do not know how we will deal with that. It is a tough problem.
We will take some answers and then I will return to my colleagues. At other hearings almost everybody suggested having a public awareness campaign so obviously there is a strong belief in these. Perhaps the committee will do some research on this point. I believe such campaigns work well in the UK and other countries. The delegates may have some research on that. The committee might take up this proposal for action as it has been suggested so often. I call Mr. Mark Fielding.
Mr. Mark Fielding:
I might comment on the last point. There are figures showing the insurance campaign worked and the insurance industry would be well able to advise the committee concerning that. I cannot give straightforward figures for the television licence campaign but have been told anecdotally that both approaches have worked. The awareness campaign is not just about throwing a couple of advertisements on the television. We need to have a change in our culture. We have spent 800 or 900 years dodging, ducking and diving the people who were our overlords, and this is now inbuilt. Being an informer is something that makes all of us say, "Oh, my God". However, part of getting this right is having people know that if they go outside the legitimate way of doing business they will be caught. A lot more is involved, however, and I agree with the Deputy that a cultural change is involved and that we will have to start on this somewhere. I believe an awareness campaign right across the board would have an effect over a period of time. This will not happen in one year or even 20 years - it is a generational thing - but we have to start it sooner or later.
With regard to whether amnesties work, I take the point that every time there is an amnesty people think it will last for a while and they will be able to catch one again in the future. I would like to see figures from the Revenue Commissioners with regard to the previous amnesties. This one is aimed at the social welfare side of things rather than the tax side. Many of the people who were ducking and diving in this area may not even have a lot of tax to pay but it would be worth following through on the social welfare side.
I do not agree with the Senator that ISME members might be caught on this. We are all very law-abiding, something I had better put on the record. I will pass over to my colleagues.
Mr. A. J. Noonan:
I will talk about the social welfare side because we are not talking about a tax amnesty - we have had enough of them. I refer to Deputy Dara Calleary's point on the social amnesty. It is estimated that 3% of the social welfare budget is going out in some form of fraud. It is those receiving social welfare who really need it who are being penalised because the total has been cut back this year by so many millions of euro. We are open to ideas on how this amnesty would work; we do not have a magic formula. The committee members are the legislators, the ones who have to come up with the solutions. However, if there is an amnesty and some people come forward and put up their hands while another element does not, the latter should be severely penalised.
Senator Quinn spoke about his pal in America. That is right. He was jailed because he was committing fraud. In Ireland we must accept this will be our future, which will lead to a proper societal commitment to the whole thing.
Ms Avine Mcnally:
I would like to pick up on some of the other points. Obviously I concur with what Mr. Noonan has just said. In regard to the awareness campaign, as with any of these issues it is about the message one is trying to get across. People's opinions, though not shared by everybody, will come round to this way of thinking. To be honest, I have never looked at any research on the impact on turnaround of a television campaign. However, looking at the figures the Department of Social Protection has, one sees an increase of 11,000 telephone calls to its fraud line in the past 12 months, making a total of 28,000 calls a year. I believe we are beginning to see people getting a little bit frustrated and annoyed with others cheating or trying to cheat the system. This approach will not win everybody over but I believe we are beginning to see people's mindsets moving towards being more in favour of calling people out and perhaps reporting what is going on.
Deputy Calleary asked what was happening in other jurisdictions. The UK has set up a hidden economy monitoring group, some of whose suggestions are very much echoed by us. It believed an awareness campaign was something worth considering and also suggested the need to look again at the tax system, taking the attitude that if it is more favourable for people to be involved in a taxable regime then they will do so rather than stay in the black economy. This group has also undertaken huge work in assessing the barriers people face in getting from the black economy into the formal economy. In other words, that is a regime which reduces the burden of setting up businesses correctly. I realise we have done a lot of work in Ireland on this but I offer this material to give an idea of what our closest neighbour is doing.
I thank our three witnesses for the concise and well-presented cases they have made. In regard to the public awareness campaign I believe people are now much less tolerant of abuses of the social welfare system and of people doing things that cost the taxpayer money. I firmly believe a well-targeted public awareness campaign would bring many people who decide to go straight into a legitimate business operation. Mr. Fielding really hit the nail on the head when he pointed out that in order for the black economy to thrive, as well as the seller there must be somebody who buys. Obviously people can be prosecuted if they are in receipt of stolen goods but there should be other penalties. We must look at having a situation where people will be penalised if they knowingly purchase illegal and illicit goods such as laundered diesel, smuggled cigarettes, counterfeit branded clothing, etc. In addition, we need to look at what is happening at some of the Sunday markets where so much illegal and illicit material is being peddled throughout rural Ireland, Sunday after Sunday, as I am well aware.
I believe it was Mr. Fielding who raised the point about incentives to homeowners who use regulated and registered contractors. I firmly believe we will never get the economy moving again unless we have a fair level of activity within the building industry. At some stage in the near future I would love to see us having a scheme for house refurbishment or the upgrading of energy efficient homes whereby people would receive some level of grant incentive on condition the work is done by registered contractors. That is the only way. We must do something to bring some of these people into the legitimate area of activity.
I refer to commercial vehicles. People are able to tax their trucks and vans at a much lower rate on the basis they are being used for commercial purposes. All they have to do is get a garda to sign a form indicating this is the case. However, they should have to prove they are tax-compliant and up to date with Revenue in order to qualify for the lower level of taxation on commercial vehicles. The whole area of penalties and the sentencing regime must also be examined. There is an acceptance that people get very small penalties in our courts for quite significant infringements.
I am not sure how the amnesty would work but would like to see a situation whereby people who have started up small businesses in the black economy would have an opportunity to register, within a short period, and become legal. We all hear on a daily and weekly basis that legitimate businesses just cannot compete with some of these guys who seem to be operating with impunity.
I have reason to believe that in recent times the Revenue Commissioners are more being proactive in making contact with persons who may be operating small businesses from the back of houses, for example. I assume Revenue is receiving tip-offs from the general public. A heightening of the public awareness campaign would result in some of these illegal operators being put out of business. However, the really big operators are trafficking cigarettes and diesel and other counterfeit goods. While there has been significant progress in the Border area, including the smashing of laundering activities, the people concerned seem to be able to get back into business quickly. I await the comments of the delegation.
I refer to Senator Mullins's point on diesel laundering. Much work has been done to counteract this activity. Last October the Department of Finance introduced new legislation to ensure the traceability of diesel. At the time it was said it would take at least six or eight months before results would be apparent. The outcome will not be known until June or July this year. We are working in partnership with the United Kingdom in an attempt to find a way to mark the diesel in order that it cannot be dyed. It is a complex issue which is made more so by the Border. We are all aware of the difficulties imposed on legitimate businesses.
If the statistic for Australia and New Zealand is 9% and that for the rest of Europe is 15% to 18% - a figure of 16% has been suggested - what is the model being followed in Australia and New Zealand? What can we learn from their experiences? We need to see a change in culture.
With regard to start-up businesses, Revenue has ensured it has never been more easy to register a business. Revenue's website is one of the best public service websites available and its staff provide great support and helpful advice. I know this because I worked in the small business sector for many years. However, small businesses, for their part, must be willing. A bigger problem for them is that they initially do not keep an eye on cashflow management. They forget to pay the tax man and instead use the money to drive the business. It could be down to mentoring, a pet subject of mine. I refer to the importance of providing advice for small businesses at an early stage, rather than regarding it as an issue for Revenue. I acknowledge that Revenue officials visited small businesses, but there is only so much advice one can give people who must be willing to accept and understand the financial aspects of running a business. More work is probably needed in this regard, but Revenue is available to provide support for those who ask for it.
I agree with the points made by Mr. Fielding. I refer to the high level of operation of the black economy during the 1980s. Taxes were lowered during the 1990s and more businesses operated legitimately. There has been a resurgence of the black economy as taxes have increased. However, times have changed. People now will not pay for services in the black economy; they will write a cheque or offer a card and demand an invoice rather than pay in cash. I have noted that this is happening in the trades and services sectors. There has been a cultural change. Revenue is doing much good work in this area by following up on advertisements in newspapers and the mobile phone numbers of those offering services. For the most part, the days of people paying for services with cash are long gone. However, there is a need for a further awareness campaign because the public needs to be made aware of the fact that the level of taxes could be reduced if everyone played ball on this issue.
I wish to make two brief observations. In making a rough analysis I tend to divide this activity into two broad categories. I refer to the nixer culture which flourishes in times of high unemployment. During the recent construction boom the legitimate industry offered very high rewards in the carpentry and plumbing trades, for example, and people were in a position to pay for these services. There was a dramatic decline in the level of activity referred to, in Dublin in particular. The other category is the cross-Border phenomenon of trading in goods which had its origins in the smuggling of tea, butter and cattle, but now the trade is in diesel and cigarettes. This activity started in Border areas and is controlled by the paramilitaries and their hangers-on and also criminal types. We need to be aware of the two dynamics at work in these two categories in order that we can tackle them. Two approaches are needed, as they are both equally harmful to legitimate trade.
Mr. A. J. Noonan:
I agree with the point on mentoring which this is crucial in all businesses. In the past 48 hours I heard of a chap who was on social welfare. He wanted to do a few days' work and become part of the system. The company in question wanted him to be self-employed for a few days. He explained that if he was self-employed and then returned the following week to the social welfare office, he would receive no benefits. That is a great obstacle. If the committee could come up with a simple methodology to allow that chap to do a few days' work and then return to the social welfare system, it would be wonderful.
We were assured that this issue would be dealt with and that the system would be more flexible in order that people could hop on and off. However, it has not happened. It is probably working in a few offices but not across the country.
Ms Avine Mcnally:
I refer to the point raised by Deputy Collins on the statistics for the black economy being lower in other countries. The reason is that those countries have a more flexible social welfare system. Their taxation systems are very different from ours, but there is greater flexibility. It must be borne in mind that one is dealing with criminal minds when dealing with fuel smuggling. They have a lot of time on their hands to think of ways to get around the system. Revenue staff who have extensive experience in this area are of the opinion that the smugglers regard public announcements of successful campaigns against smuggling as an incentive to them to beat the system. That is not an excuse, but it is the reality. While no one has the golden ticket solution, it keeps happening because the smugglers keep thinking of ways to get around the system.
Mr. Mark Fielding:
I take the points being made about an amnesty and the marking of diesel. I also take Deputy Collins' point on mentoring. These things are happening, but they are not happening fast enough. I refer to the view that an awareness campaign and advertising will not work. The level of tax compliance has increased dramatically in Ireland because the system was made so simple. I remember what happened in the 1980s before it became a little easier to pay one's tax. At the time tax evasion was evident. The advertising campaigns are having an effect. As I acknowledge that public awareness will not be achieved overnight, we really need a cultural change. The issue is multifaceted and there are not just one or two answers. There are about 87 black or hidden economy activities.
We also need to watch out for what I call the bleeding hearts who will not call it the black economy but who will talk about the grey economy and the hidden economy as if it is easier and nicer. The fact is these people are undercutting legitimate businesses and are putting people and jobs at risk because they are working in the black economy. We need to make that clear and get it across to people that the black economy is not all right and that is where this awareness campaign comes in. The person who is purchasing from the rogue operator needs to be curtailed as well and needs to know the effect on the economy.
Mr. Fielding is right. That was the reason the committee took this on. This is costing jobs and if we get that message across, it will have an impact. The reason we are having meetings around the country is to invite Ministers and even the Taoiseach and make them sit and listen to what is happening because this must become a Government issue. This committee's job is to make it an issue and to push it as hard as it can. It is fixable and that has been proved to us in most meetings we have had. We would actually make money out of this. This should not cost money, although it might cost a little in the short term. It should bring a lot more money into the Exchequer, so we will keep pushing it.
On behalf of the members, I thank the witnesses. We will wrap up in a couple of months and we might consult the witnesses again. Perhaps members of ISME and SFA might join us in Galway and Mayo next week. I also thank the members of the committee and remind them of our trip to Ballinasloe and Mayo next week on 22 April. The following week we will have an EU Presidency meeting in Dublin Castle, and there will be another on 29 April. The reason we are not meeting next Tuesday is that it will be Question Time in the Dáil with the relevant Minister.