The value of extra tax yielded by the Revenue dropped from £13,382 in 2015/16 to £11,613 in 2016/17, research from top 10 accountancy firm Moore Stephens revealed.
The total amount generated from these investigations was £173m, down from £182m the previous financial year.
“Hidden economy” is undeclared economic activity that involves “ghosts” – whose entire income is unknown to HMRC, and “moonlighters” – who are known to HMRC in relation to part of their income, but have other sources of income that HMRC does not know about.
This can include individuals renting out assets or property, or working freelance on a cash-in-hand basis, who might be unaware that they should declare the extra income or believes they will not be caught.
Moore Stephens said that the fall in extra tax has forced HMRC to look at more marginal cases, such as at introducing “conditionality measures”, which would make tax compliance compulsory for access to trade licences.
Dominic Arnold, tax partner at Moore Stephens, said, “As the drop in the value of extra tax brought in from investigations suggests, the hidden economy is notoriously difficult to police.
“Added to the relatively low recovery per case, this calls into question whether investigations into the hidden economy are the best use of HMRC’s limited time and resources.
“Everyone accepts that HMRC has an obligation to police the hidden economy - but should these investigations come at the cost of not dealing with more serious and high-value tax evasion?”
The firm said that, in order to help close the tax gap, HMRC should focus on measures to prevent individuals from failing to declare their income.
An HMRC spokesperson said, "Most individuals and businesses pay the tax that is due. HMRC is determined to keep up the pressure on the small minority of individuals and businesses who attempt to hide their liabilities. Tax receipts from our enquiry work ebb and flow for a whole series of complex reasons, a few large cases can always distort the figures in any one year."