You probably have an idea in your head about what the black market is. That idea might have come courtesy of some action movie in which a shipment of illegal samurai swords leads to multiple car chases. In reality, the black market can be a much more every day occurrence and something businesses might not even realise they are coming into contact with.
It can be as simple as paying the carpenter in cash for a new front door, if your carpenter decides not to record and pay tax on that transaction. So if the black market really is all around us, what do businesses need to know about it?
A black market, also known as a shadow economy or underground economy, is a market where goods and services are traded illegally. The key point to understand is that the transaction is illegal, not necessarily the goods or services being traded.
Remember our carpenter, there’s nothing inherently illegal about supplying front doors but the transaction is illegal because it wasn’t recorded properly as part of the accounting process and as such it won’t be submitted to Revenue.
Why does the black market exist? Well, aside from the exchange of goods and services that are illegal or contraband, it is used to trade goods and services while avoiding taxes and price caps as well as other regulations which can decrease profits. For example, a carpenter who doesn’t record that he has sold and fitted a new front door might get away with not paying the VAT to Revenue. This means that he can keep more of the money received from the sale for himself or his business.
It’s important for businesses to note that because black market transactions are illegal they are seldom recorded. Therefore, they are not part of the accounting process or the formal economy. This means that the legal protection you expect to accompany standard transactions doesn’t necessarily apply. The primary reason for this is documents of record, or lack thereof. As our earnest carpenter didn’t record the transaction because he didn’t want to pay VAT, we didn’t get a receipt from him. Therefore, proving that the transaction actually happened with him could be more difficult than expected.
That’s not a good place to be if the hinges come off two weeks after the door has been installed. Always insist on a receipt for a sale, and an invoice if applicable.
Another area of business which contributes to the black market is employment and human resources. Whenever a business employs someone, there are certain obligations that they must meet. There’s a lot of paperwork to produce and taxes related to employment to account for and pay. If a business does not meet these legal and financial obligations, that employment could be contributing to the black market.
There are many theoretical debates regarding the black market and what place it has in our economy. However, the simple fact is that transactions that take place as part of the black market are illegal, and partaking in these can put your business in harms way from a legal standpoint. Here at Big Red Cloud we always support doing business the right way, that’s why we provide accounting software.