But sometimes these businesses end up trapped in the \u201cinformal\u201d or \u201chidden\u201d economy \u2013 not because of personal greed or an aversion to paying tax, but because they can\u2019t afford to lose the customers that helped them get started in the first place.<\/p>\n
Our research highlighted the problems<\/a> workers face as they set out intending to build a fully legal and legitimate tax-paying business. <\/p>\n Many cash-in-hand businesses win their first customers \u2013 who may be supportive neighbours or friends \u2013 by being cheap. Working in cash, without the tax and overheads a registered business has to carry, they can undercut everyone else. <\/p>\n Those prices then become expected and lead to word-of-mouth recommendations. As one self-employed plasterer told us: \u201cAt the start I kept the price low just to get work, to build it up. But now people expect that [same] price. <\/p>\n “If I raise it, they\u2019ll go somewhere else. It\u2019s hard to change it once you\u2019re known for being cheap.\u201d<\/p>\n A heating engineer commented: \u201cInitially, I did build a good customer base, but now I know [it was] because I was so cheap. I wasn\u2019t accounting for tax and all that.\u201d<\/p>\n Trust and reputation can grow by being a familiar, reliable face in the neighbourhood. As one painter and decorator explained: \u201cI didn\u2019t need a website or anything. People know me around here, they knew I\u2019d do a good job. That\u2019s how I got work, just word of mouth. That\u2019s all I needed.\u201d<\/p>\n A cash-in-hand economy runs on trust, reputation and identity \u2013 which is precisely why lots of businesses don\u2019t manage to leave it behind.<\/p>\n Becoming an \u201cofficial\u201d business can feel like breaking faith with the people who vouched for you, or like turning into a business you never set out to run. This became problematic<\/a> for a lot of the businesses in our study.<\/p>\n As one business owner who works in car repairs put it: \u201cPeople know you because you\u2019re one of them. Once you try and go bigger, that changes.\u201d<\/p>\n Some of our interviewees saw the formal system as having been built for someone else. One told us: \u201cI\u2019ve seen lads go legit and get hammered by the tax man for one [accounting] mistake. I don\u2019t trust it. I pay my dues in other ways \u2013 doing good work, looking after the lads I work with. That\u2019s how we survive.\u201d<\/p>\n Regardless of the rationale for operating in the cash-in-hand economy, staying informal was not seen as a comfortable or easy choice. <\/p>\n One business owner who eventually registered described life off the books as being \u201con edge all the time\u201d. But for most, the pull of the community outweighed the push of the risk. <\/p>\n Their legitimacy came from their neighbours, not from HMRC, and they protected the version that paid them.<\/p>\n Government policy<\/a> treats going legitimate as an administrative step<\/a>, but our research suggests it is actually more of a social transition. It asks the business owner to reprice every relationship they have, and to change who they are in their community. Support schemes that ignore this will keep failing.<\/p>\n If it takes a village to raise a child, something similar is true of small businesses. The first customers, the word-of-mouth referrals, the neighbour who vouches for you all help a new business get going. But the same village which has raised that business can also hold it back. <\/p>\nTrust and identity<\/h2>\n
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