It pays to be honest about your taxes

August. The Edinburgh Festival. To (another) magic show with the kids, this time with "time travelling magicians" Morgan and West. There was something utterly revolting involving needles and a clever biscuit-related mind-reading stunt. But the best trick of all involved as is often the case in life money.

West dropped coins taken from a random audience member named Roy into a glass and Morgan appeared to be able to figure out from the sounds they made as they hit the bottom which they were and what they added up to (£3.47 in this case). He then went one better and told us the final four numbers of Roy's debit card on hearing it dropped into the same glass.

The audience was wowed. They oohed and aahed and looked around for the secret in the glass. I didn't bother. I had already assumed from his impressive data management skills that Morgan's day job is at HM Revenue & Customs, in which case knowing the full details of the finances of every member of the audience, down to the junior Sipps of the kids in the back row, would have been a straightforward part of an honest day's work.

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Last year, the tax office launched three consultation papers on how to deal with people operating in the hidden economy the "ghosts" who declare none of their moneymaking activities and the "moonlighters" who don't declare all of them.

The first two papers offered simple ideas: be nastier to anyone you catch and inhibit the business activities of those you don't by making access to services or licences conditional on being registered for tax. Before getting a licence, for instance, landlords of houses in multiple occupation (HMOs) would have to register for self-assessment and cafs would have to do health and safety checks.

The third was all about data. Since 2011, HMRC has been using a computer system called Connect to catch tax dodgers by sifting through huge amounts of seemingly unrelated data (bank and PayPal accounts, credit card data, property transactions, company ownership records and names and addresses from Airbnb, for example). In something of a first for a government computer system, this works pretty well. The last consultation was about extending HMRC's data-gathering powers to money services businesses (currency exchange and the like).

Add this all up and you will quickly see that any financial privacy any of us once had (and hence any ability to be a long-term moonlighter) is either gone or going.

For a hint of what this means in practice, look to Newham. The London borough runs a property licensing scheme and has 27,000 registered landlords on its lists. But when it gave HMRC the names of those landlords for some simple analysis, it was found that almost half (13,000) are not registered for self-assessment.

This doesn't necessarily mean all of them are not paying tax on their rents. Small amounts due can be collected via PAYE and some properties will be owned by companies or trusts and separately accounted for. But even if you make allowances for this and assume that, say, 10,000 rather than 13,000 landlords are not properly declaring rent, there is clearly something of a problem here.

Use the average rent in the area (just over £16,000 a year) and £166m of gross rent is not being declared. Assume a 10% profit margin and an average tax rate of 30% (some will be 20% payers and some 40%) and HMRC is down £4.8m in revenues in one London borough alone.

Let's extrapolate a bit more. There are about 1.75 million landlords in the UK. Let's assume that across the country there's a little less cheating than in Newham. That would give us 500,000 non-declarers. Assume their gross rents are much lower than those in London let's say £10,000 a year. Then assume a similar profit margin and blended tax rate and we end up with £150m in evaded tax.

My assumptions here have been kinder than some others. A 2014 study by the Institute of Public Policy Research came up with a number of £180m for London alone and one of the UK's more extreme economists has put the national sum at £1bn. But whatever assumptions you use, you are definitely talking real money. Newham is, says Andrew Hubbard, tax consultant at RSM, clearly the tip of a "very big iceberg".

You will see that there are two interesting things here. The first is how easy it is to use data to catch people. The second is just how many people there are to catch. The HMRC hidden economy consultation documents make much of the idea that the "vast majority" of UK individuals and companies willingly pay their "fair share" of tax and puts our tax gap (the difference between what we pay and what we should pay) at a mere £6.2bn. But if the numbers in Newham turn out to be anywhere near accurate the authorities are going to have to replace the word "vast" with "tiny" in the introduction to their next consultation.

And the rest of us are going to have to accept that as much as we enjoy haranguing large companies and celebrities about tax avoidance, the real problem regular, small-to-medium scale evasion may be happening in our own back yards.

We might also note that individual evasion is more of a problem than it used to be. Thirty years ago, if someone earning very little didn't register for tax, it made no real difference to anyone. If there is very little tax to pay, who cares if you register? Today, the system pays significant amounts to low-income earners in the form of tax credits. Deliberately under-declare and claim tax credits too and the cost to the honest taxpayer (and by long-term extension, the honest tax credit claimant) can be pretty high. Have a declared income of £10,000 and three children and you can be paid another £12,205 in tax credits alone.

Perhaps if every riding school, garage, landlord, personal trainer, caf owner, dog walker and builder (you can get a sense of which professions dodge most here on HMRC's deliberate defaulter "name and shame" list) had their data analysed by Connect, the UK's obscene deficit might look very significantly smaller.

If all this talk of the power of data is making anyone feel more nervous now than they were in paragraph one of this article and given how many readers are also landlords, statistically a good few of you must be it is time to take some action (ask your accountant about the Let Property Campaign if you are an errant landlord, for instance).

If HMRC thinks you have made a careless error, they might investigate you going back six years. If it thinks you are a deliberate defaulter, that will be 20. You'll pay back what they say you owe (the appeal process is not a happy one) and you'll pay penalties and interest too. This articleis mostly about how you should manage your finances. Given the potential downside of being a ghost or a moonlighter, these days a large part of the answer has to be "honestly".

This article was first published in the Financial Times.