War waged on Europe's €2trn black economy

Tax dodgers are costing Britain £64bn a year and the black economy is so large it could pay off the national debt, according to a new study. The amount the Exchequer loses to tax cheats is equivalent to more than £1,000 for every man, woman and child in the country.

These figures are estimates based on a European Commission study highlighting the size of the shadow economy across Europe.

In Britain, efforts to escape tax – whether by those not declaring income, or businesses exploiting tax loopholes – are contributing to a black economy that estimated to be worth £160bn a year.

At 10.5 per cent of Britain's GDP in 2011, this is bigger than the deficit, which stood last year at 8.3 per cent of GDP.

The shadow economy – people working or trading "off the books" – results in tax lost to the Exchequer of up to £64bn, according to British tax experts. This number assumes the proportion of tax as being 40 per cent. It is 16 times the £4bn tax loss the Government estimates from the hidden economy.

"Near enough £1 in every £8 in the British economy is in the shadow economy – the cash-in-hand, illicit, undeclared part of the economy that exists almost entirely to make sure tax is not paid," said Richard Murphy, director of Tax Research UK.

"That costs us approaching £70bn a year in lost tax revenue – enough to pay for the defence and law and order budgets in their entirety, or to close more than half the annual current deficit."

Revenue & Customs has slashed its staff from 100,000 to about 65,000 in the past seven years, and the department plans to cut numbers to just over 50,000 by 2015.

"When a government demands its tax authority halve in size, the result is an inevitable breakdown in tax law and order, and that's exactly what we are suffering," he added.

In Britain and other countries there is a need to address the "pay as little as you can" attitude of some companies, said Algirdas Šemeta, the European Commissioner responsible for taxation.

"Why should teachers, nurses and shopkeepers carry a heavier tax burden just because large companies can employ clever tax planners to avoid paying their share?" he said.

"The UK is certainly not the worst pupil in the class in the EU. Nonetheless, we're still talking about billions of pounds falling through the net, at the expense of the honest taxpayer."

Britain is part of a European shadow economy worth ¤2trn (£1.6 trn). Tens of billions of euros remain hidden in offshore accounts, "often unreported and untaxed". The Cayman Islands, a British overseas territory, is one of the fastest growing tax havens, according to the EC report.

The scale of the problem has prompted the EC to act on what it describes as "not only an issue of revenue, but also of fairness".

"Honest taxpayers should not suffer additional tax increases to make up for revenue losses incurred due to tax fraudsters and evaders," it says in the report.

Tough new measures are being drawn up in what amounts to a war on tax dodgers. Action plans to crack down on tax havens and companies involved in "aggressive" tax planning will be produced by the end of the year.

Calling for concrete action from member states, the report's recommendations include: the introduction of auditor teams to investigate cross-border tax fraud; a European tax number to prevent people exploiting different tax systems; minimum criminal penalties for tax cheats; and a "quick-reaction mechanism" on VAT fraud.

A Treasury spokesman said: "The UK Government is fully committed to tackling tax fraud and evasion and has invested over £900m in a Revenue & Customs crackdown on these. This is an interesting report and we strongly support some of the suggestions made. However, we would want to be sure that any action within the EU did not impinge on member states' ability to run their own tax systems."