HMRC is losing £150bn per year due to black market

The size of Britain's black market is much smaller than last year and most other western nations, according to a research report.

A study by thinktank, the Institute for Economic Affairs (IEA), found that the country's shadow economy is currently worth about £150bn ($229bn/€176bn) a year, the lowest level in almost a quarter of a century.

In Britain, illicit economic activity amounts to 10% of the 2012 gross domestic product (GDP) compared to 20% in Italy, Greece and Spain.

The UK saw its peak rate at 13% in 1997-98. The black market stood at 12.2% of the British economy in 2007. Later, it shrank to 10.9% in 2008 and to 10.3% last year.

The report by economists Friedrich Schneider and Colin Williams also found that punitive tax regimes have led to the shadow economy employing 30 million people across the European Union. The 34 developed nations in the Organisation for Economic Cooperation and Development have an average shadow economy size of 13.4% of GDP.

The authors attributed much of the shadow employment in Britain to the loss of benefits and tax credits for low-paid workers.

"Employment costs in the official economy have risen as after-tax earnings from work have declined. This has encouraged both workers and businesses to reduce their tax liabilities by abandoning formal employment," the IEA said.

The research also listed ever-increasing levels of regulation, recession and lack of trust in government as reasons for illicit activity.

"Evidence proves that excessive taxation and regulation is a boon for illicit economic activity. A simplified tax system would reduce this by developing a culture of commitment to paying taxes," said Professor Philip Booth, editorial director at the IEA.

"The government must make legal work easier and more beneficial by providing incentives for those working in the shadow economy to move to the formal sector. At the same time radical action is needed to reduce the burdens of taxation and red tape which led so many into the black market in the first place."