How much for cash? Why the informal economy is bad for business, consumers and society

Who hasn’t heard someone ask, “How much for cash?” While it may seem harmless, research reveals such demands contribute to a growing culture of informality in business.

This “grey” economy, where economic activities occur without taxation, remains a significant global issue. Estimates suggest that up to one-fifth of economic activity worldwide occurs in the shadows. While the allure of lower prices may initially benefit consumers, the long-term costs can be substantial, affecting businesses, government revenue and consumer protections.

Our new research within UK service sector businesses in the East Midlands indicates that these quick transactions also have many unseen costs.

Cash-in-hand payments can be convenient for consumers and businesses. From a customer’s perspective, paying cash often reduces the cost of services. For businesses, especially small and medium-sized enterprises (SMEs) operating on thin margins, cash transactions provide cash without the delays of invoicing.

Our research highlighted how consumers can inadvertently pressure businesses into the informal economy by pushing for discounts for cash payments that bypass tax and regulations. In doing so, rules are often sidestepped, as one business owner confirmed:

You do feel pressure from customers, which drives all prices down … The only way I can keep cutting costs would be to either use cheaper materials, not pay everything (income tax and VAT), or employ people off the record.

In some cases, consumers directly request things such as VAT exemptions. As one business owner noted, consumers often ask to “lose the VAT”. Another business owner said that if an invoice shows VAT listed separately, many customers immediately want it to be taken off.

The research showed that consumers often view VAT as a “business tax” that doesn’t concern them. Another business owner noted that when customers ask to “lose the VAT” they are effectively asking business owners to commit VAT fraud.

Market conditions intensify the impact of these demands. When faced with stiff competition from businesses that bypass all regulations, one business owner felt they must cut prices or risk losing consumers to fully informal competitors.

When there’s no other work, you have to take it … It’s a survival choice rather than greed.

Persistent requests for cash discounts can create a perceived social acceptance that avoiding tax and other regulations is normal. Yet over time, this erodes the legitimacy of businesses that play by the formal rules.

Business owners also noted that as cash-in-hand transactions became more common, their reputation with suppliers and financial institutions were more challenging to maintain. Businesses that rely on cash payments can have difficulty securing funding or investment, as they don’t have a verifiable financial history.

Off the books

The push towards informality can have lasting consequences for SMEs, which often lack the resources and profit margins to absorb frequent price cuts. One small business owner said that some businesses go “entirely off the books” in order to survive. He added that if too many customers want cash deals, businesses end up feeling like they have to do it.

This is not the only concern though. Consumers also lose legal protections by choosing cash-only deals, leaving them vulnerable to poor outcomes with no official channel for complaints or compensation. This lack of recourse affects customer satisfaction and tarnishes trust in local businesses over time, affecting the reputation of those who operate legitimately.

In practical terms, informal cash deals don’t yield true profit for business owners. Instead, they simply allow owners to compete temporarily with more “serial off-the-books traders” who have no intention of ever complying with formal rules.

Rising costs due to tax and minimum wage changes could put employers under more pressure to work ‘off the books’. Harbucks/Shutterstock

The UK budget in October also added to the financial strain on SMEs by raising employer national insurance contributions and introducing a rise in the national minimum wage. Although wage rises will be beneficial to workers, the move will stretch SME budgets further, limiting the potential for growth investments due to increased operational costs.

Cash discounts contribute to a culture of informality that pressures businesses, reduces overall tax revenue for the government and erodes trust in the wider economic system.

Addressing cash-in-hand payments requires a balanced approach that respects the needs of small businesses while encouraging a more transparent economy. Public awareness campaigns could play a significant role in helping consumers understand how cash-in-hand, informal transactions encourage tax evasion. Highlighting the importance of fair pricing and how taxes fund public services can create more mindful consumer practices.

Policymakers also have a role to play by simplifying tax regulations and offering incentives for businesses to remain or move into the formal economy. Tax deductions or credits for businesses with transparent financial practices could encourage greater compliance.

Simplifying VAT requirements or offering tiered compliance for smaller businesses could also help reduce the administrative burden and incentivise legitimate practices. While awareness and incentives are essential, enforcement must also be part of the solution. Increased tax authority resources, alongside improved detection methods, can help identify businesses engaging in off-the-books work.

The next time you hear the question, “How much for cash?” it’s worth reflecting on the broader impact of this choice.