Business owners are deciding not to register due to the hassle and cost of dealing with the government, a YouGov poll taken in tandem with the report found.
A fifth of respondents told pollers that they traded informally when they first started their business, with 40 per cent of this fraction putting their decision down to needing “breathing space” before they hit the capacity where registering the business became necessary.
Forty-eight per cent of respondents said that red tape made registering their business difficult, while 34 per cent pointed to high taxes as the major block on coming into the formal economy.
Just nine per cent said they avoided registration and entry into the formal economy because it earned them extra income – but the exchequer is still losing out to the tune of £4bn, the report reckons.
“A combination of drivers, including burdensome taxes, a lack of financial credit, and poor business advice often serve to exclude to exclude people from the formal, tax-paying sphere,” said report author Benedict Dellot.
“For many entrepreneurs, the route towards formalisation is marred with barriers and takes time to complete,” he added.
Dellot demanded that the government switch its policy from aggressive deterrence, to encouragement, in order to bring about more compliance and help businesses through the difficult early stages.
“If we continue to deploy punitive measures such as harsh penalties we risk stamping out entrepreneurial assets...before they have a chance to be fully realised,” he said.
The report goes on to recommend changes to the regulatory framework, including official programmes where businesses can be created in as little as one to two hours.