Call to recognise the entrepreneurialism of the informal economy

The Government's punitive approach towards tackling undeclared work discourages entrepreneurs from registering their businesses and costs the taxpayer £4bn every year according to a report published by the RSA.

Untapped Enterprise concludes that engaging in the informal business activity is often a necessary step along the journey towards becoming a successful entrepreneur.

View the Untapped Enterprise: Learning to live with the Informal Economy report

A Yougov poll released to coincide with the publication of RSA and Community Links report found that 20 percent of small business owners had traded informally when they started their company. Of these:

• 40 percent said one of the main reasons for doing so was because it gave them the breathing space needed before they had the capacity to register their business

• 60 percent said it was because they first wanted to see if their business would be viable

• Only 9 percent said they engaged in informal trading to earn extra income

Nearly half (48 percent) of all respondents cited red tape as one of the biggest individual factors in preventing entrepreneurs from being able to register their business. Thirty-four percent identified high business and personal taxes as a major barrier to formalisation.

Untapped Enterprise argues that authorities charged with tackling undeclared work should take a radically different approach and that more should be done to support people to register their businesses.

The report recommends that the government consider recognising the informal economy to be a legitimate stepping stone that helps informal entrepreneurs make their way to the formal economy. 47 percent of the RSA's survey respondents agreed that engaging in informal trading is often a necessary step as part of the journey towards becoming a successful entrepreneur.

Drawing on learning from other countries the report calls for a new initiative for the Work Programme whereby contractors are paid on a case-by-case basis for helping hidden entrepreneurs to take the steps along this journey towards formalisation.

The report also recommends a programme be created where businesses can be established in a very short timeframe (1-2 hours).

Commenting on the report, RSA researcher and author of the report Benedict Dellot said:

"The factors that prevent entrepreneurs from registering their business are many and varied. A combination of drivers, including burdensome taxes, a lack financial credit and poor business advice, often serve to exclude people from the formal, tax-paying sphere. For many entrepreneurs, the route towards formalisation is marred with barriers and takes time to complete, but we believe it can be achieved through a ‘stepping stone' process.

We are therefore calling for government to support entrepreneurs along their journey towards registration, rather than relying on a model of deterrence to force people into compliance. If we continue to deploy punitive measures such as harsh penalties we risk stamping out the entrepreneurial assets of hidden entrepreneurs before they have the chance to be fully realised. In the current economic climate, this is something we can ill afford to lose."

The report recommends:

• Create a single Hidden Economy National Committee which draws together key stakeholders to share information and data, and to devise new interventions

• Create a programme where businesses can be established in a very short timeframe (1-2 hours) face to face

• Work with schools and colleges to design early intervention schemes targeted at groups of young people who are likely to enter self-employment (e.g. apprentices)

• Establish a new initiative for the Work Programme whereby contractors are paid on a case-by-case basis for helping hidden entrepreneurs to formalise their operations

• Seek to recruit and train ‘formalisation' champions from the communities where targeted HMRC interventions are underway, thereby giving the authorities greater leverage to change local behaviours

Aaron Barbour, head of linksUK Community Links, said:

"This comprehensive research finds that 'one size fits all' punitive approaches to tackling the hidden economy simply don't work. A more nuanced, multifarious set of policy approaches are needed, which take into account people's various circumstances and motivations for trading informally. We urge government and its civil society partners to be bold and address the UK's informal economy for the good of us all."

View the Untapped Enterprise: Learning to live with the Informal Economy report