Author Mark Richards

If the recommendations in the Taylor Report are followed we will soon stop making cash payments. It is a move intended to cut down on the ‘shadow economy’ and raise more for the taxman: but how does the UK compare to other countries for cash payments? And does cash still have a part to play in society?

Yesterday? It was just a normal day. I had my hair cut. That cost £7.50 – and obviously a 50p tip for Karen. Got home – the window cleaner caught me, so that was another eight quid. And neither of us felt like cooking, so I went to our favourite Chinese takeaway.

And what do Karen, the window cleaner and ‘Kenny,’ the owner of the takeaway, have in common? I paid them all in cash.

Well, not for much longer if we follow the recommendations in the Taylor Report…

What is the Taylor Report?

It is a report commissioned by the government – and written by Matthew Taylor, a former head of policy for Tony Blair – which looked at employment practices. Much of it concentrated on the ‘gig economy’ and concluded that all work in the UK should be “fair and decent.” This is bound to capture all the headlines, but also included in the Report was a recommendation that cash payments should be phased out.

Why make this recommendation regarding cash payments?

Mr Taylor said that cash jobs – such as having your hair cut and paying your window cleaner – were costing the taxman up to £6bn a year and should be phased out. (Those of you with long memories might remember a case in 2010 when the taxman let Vodafone off a £6bn tax bill…)

While the Taylor Report stopped short of an outright ban on cash payments (so Mr Taylor at least has one foot in the real world…) it expressed the hope that as transaction platforms such as PayPal and Worldpay increased in popularity there would be a shift away from cash-in-hand work.

“In a few years’ time as we move towards a more cashless economy, self-employed people would be paid cashlessly,”

the Report said, with the suggestion that this would then allow them to pay more tax and save for a pension.

What is the size of the shadow economy?

By definition, the size of the UK’s shadow economy is difficult to estimate, but most pundits now put it at around £200bn a year – roughly equivalent to 10% of the UK’s total GDP. My personal view is that the figure is an underestimate. The shadow economy is not just haircuts, window-cleaning and the local takeaway – it also includes the murkier side of life such as prostitution, people smuggling, illicit arms sales, drugs and gambling.

How does the UK compare to other countries?

The American magazine Forbes published a scholarly article on shadow economies around the world, making the general point that shadow economies – and corruption – flourish in heavily regulated economies that have weak administration. The prime example it quotes is the former Soviet Union in the 1990s when it was reckoned that Georgia’s shadow economy accounted for 64% of GDP, while Russia’s accounted for 44%. Today suggests Forbes, shadow economies are mostly centred on Southern Europe, with the Greek shadow economy accounting for 21.5% of GDP and Italy’s for 19.8%. It puts the UK shadow economy at 9.4% of GDP – which is less than the figure quoted for Germany at 10.4%. The award for ‘most honest citizens in the world’ goes to the United States, where the shadow economy is put at just 5.4% of GDP – but given the size of the US economy, that is reckoned to be worth around $2tn a year.

The shadow economy is growing

Evidence from around the world suggests that the Taylor Report may be today’s equivalent of King Canute sitting on the beach. The shadow economy is reckoned to be the second largest economy in the world, with the OECD estimating that by the year 2020 two-thirds of the world’s workers will actually be working in what has been termed ‘System D.’ (The ‘D’ comes from a French word meaning self-starting or enterprising.) Matthew Taylor may not like it, but System D is the fastest-growing economy in the world.

Surely ‘System D’ is just human nature?

It is difficult to disagree with that sentiment. People have been avoiding tax since tax was invented: the arrival of PayPal is not going to change human nature. And there is a psychological point here. Recent elections in the US and France – and our own general election – have shown a real dissatisfaction with established politicians. Let me place a small bet – that the Government’s attempts to stamp out cash payments will have exactly the opposite effect.

Cashing Out with Cash Payments

In the interests of authentic research, I asked Karen a simple question.

“In the 20 years you have been cutting hair, has anyone ever tried to pay with a cheque or directly into your bank account?”

Karen works five days a week, eight hours a day and does, say, two haircuts an hour. Multiply that by 20 years and say, 48 weeks a year. My calculator says that is 76,800 haircuts. Her answer? “Twice.” And I think we can safely assume that her tips jar is not on first name terms with PayPal…

In praise of cash payments

In the Report, Matthew Taylor even went so far as to suggest that middle-class people who pay ‘cash in hand’ to their gardeners or window cleaners are “not good citizens” as they are enabling them to dodge up to £6bn a year in tax. Digital transactions, he argued, would make it easier for the taxman to make sure self-employed workers are declaring their earnings. He suggested that in future migrants be banned from accepting cash payments as part of the conditions for them working in the UK. Well, good luck getting your car washed in the supermarket car park, Mr Taylor.

In fact, there are plenty of positive arguments in favour of cash. Payments made in cash are almost always made to local suppliers – with the cash then circulating in your local economy. If I pay by card at Tesco or Sainsbury’s then – after wages have been paid – the money is off to a distant head office.

There are plenty of successful businesses today – employing people and paying corporation tax – which would never have started if they had not started as a ‘kitchen table’ business, taking cash and, initially, supplying friends and family.

Cash is safe from hackers – never mind phishing, even the supposedly ultra-safe Bitcoin exchanges can be hacked. Cash gives privacy: just because you are paying by cash, it does not necessarily mean you are doing anything illegal – and if cash disappears, then every transaction we ever make will be tracked by the banks and the payment processors. Lastly, there are billions of people around the world who are ‘unbanked’ – they do not have a bank account. Cash is their only means of living: without cash, they would be permanently trapped in poverty.

So the Taylor Report may have laudable aims and no doubt Chancellor Philip Hammond will be quoting from it as he closes more tax loopholes in his Autumn Budget speech. But cash still has an important part to play in our society, especially for the poorest and most disadvantaged. No doubt Mr Taylor will shortly realise this as he begs his wife to cut his hair and tries to peer out of his increasingly grimy windows…