Entrepreneurship on the margins

Putting aside the euro-zone crisis, if there was one thing that came to dominate the financial news sheets this summer it was the near endless stream of stories about how the great and the good came to fiddle the taxman.

We heard of how the world’s super-rich had siphoned off as much as £13 trillion from their home countries into tax-free offshore accounts, how over 2,000 public sector officials came to enjoy preferential treatment at the expense of the taxpayer, and how everyone from comedians to Olympians to the prime minister himself became embroiled in tax loophole scandals. The issue even took centre stage in the US presidential election debates – it may still prove to be Mitt Romney’s Achilles’ heel.

Yet amidst all the furore, what riled people the most was the comment made earlier this year by David Gauke, exchequer secretary, who said that cash-in-hand work was “morally wrong.” The intriguing part of this story is that most of the anger was not directed at the people doing work off the books. Rather it was at those who deem such activity to be surreptitious and undesirable. A rough and ready YouGov poll undertaken at the time found that 75 per cent of Brits did not think it was ‘wrong’ to pay tradespeople in this way.

This begs the question, why do people appear so comfortable with cash-in-hand work? One explanation is because of the norms set by the wealthy elite. If the likes of oligarchs avoid paying taxes worth literally millions every year, why should the plumber or the taxi driver be any different?

Another reason is that people don’t feel as though hard working individuals are getting enough out of the state relative to what they are putting in. There are no doubt many families up and down the country who are asking themselves why they have to struggle to pay the price of higher taxes and cuts in public spending when they played little ostensible role in bringing about the financial crisis.

Whatever the cause, we appear to be at saturation point when it comes to demonising workers and entrepreneurs at the bottom of the ladder. That people may be forced into the informal economy through no fault of their own is something that support charities such as Community Links have been arguing for years. What has not been articulated so strongly up until now, however, is that the people who are working under the radar may in fact not just represent the downbeat and destitute but rather budding entrepreneurs with latent entrepreneurial assets.

Whether it's plumbers, software developers, tutors or restaurateurs, there is evidence to suggest that tens of thousands of small business owners across the breadth of the UK currently engage in undeclared work as they seek to get their operations off the ground. Of the 1 in 5 small business owners we surveyed who said they had traded informally at one point in the past, 40 per cent said it was because it gave them the necessary breathing space before they had the capacity to register their business (see our new Untapped Enterprise report for more detail).

Of course, there are many entrepreneurs who trade in the informal sphere out of pure self-interest. Their goal is pure and simple: to avoid paying taxes that they could otherwise afford to cope with. But for all the stories we hear of deception and greed, there exist many other cases where entrepreneurs are excluded from the formal economy through little fault of their own. Taxes, red tape, a lack of financial credit and other barriers serve to make life untenable above the surface.

For these entrepreneurs, particularly small business owners, the informal economy is exactly the kind of protective environment they need to test their ideas and make their businesses more resilient and eventually profitable. It gives them the adequate breathing space before they can finally go on to make the transition to the legitimate economy. As such, the informal economy is an incubator, not just a refuge. To put it in Mitt Romney's terms, it is a space for 'makers', not just 'takers'.

If we accept this to be true, it is unwise to continue trying to address the prevalence of cash-in-hand work through measures such as penalties and sanctions that only treat it as though it were predominantly for the greedy and self-interested. Instead, we should be developing new support mechanisms that treat hidden entrepreneurs as aspirational, and which guide them along their slow and steady journey towards creating their own fully-fledged businesses.

Much more than this, however, is that everybody, whether policymakers or those in the business community, should be asking themselves one simple question: can we learn to live with the informal economy?