Exchequer Secretary David Gauke accused homeowners who paid workers in cash of helping them avoid tax.
He spoke out after delivering a speech at the Policy Exchange think tank on the next steps for tackling tax avoidance, which are aimed at recouping about £5 billion for the public purse.
He said: “Getting a discount with your plumber by paying cash in hand is something that is a big cost to the Revenue and means others have to pay more in tax.
“I think it is morally wrong. It is illegal for the plumber, but it is pretty implicit in those circumstances that there is a reason why there is a discount for cash. That is a large part of the hidden economy.”
The UK government is thought to lose about £2bn each year as tradesmen fail to pay VAT or income tax by not declaring cash payments and keeping them “off the books”. Her Majesty’s Revenue and Customs has raised £500 million in the past year after launching campaigns focusing on particular areas such as plumbers and electricians.
Mr Gauke made his remarks after announcing the planned reforms in the wake of a string of damaging disclosures about the financial loopholes used by the rich and famous to legally side-step hefty tax bills.
The Treasury hopes the reforms will mean officials, often hit with dead-ends when investigating schemes that are based off-shore, will be able to follow up new leads as cowboy advisers are forced to disclose their client databases. Those customers will then be formally warned how much they could owe if the scheme fails to stand up to legal scrutiny.
Mr Gauke said: “At a time of economic difficulty, when tough decisions have to be made on public spending and when the burden of taxation remains high, there is little sympathy for those who do not make their full contribution.
“For those who work hard and pay their taxes, it is galling to see others shirk their responsibilities on either front.”
He said there was a stark difference between major accountancy firms which used legitimate methods to reduce their clients’ tax bills and niche outfits which peddle crude schemes to avoid liabilities.
Mr Gauke added: “These schemes damage our ability to fund public services and provide support to those who need it.
“They harm businesses by distorting competition.”
However Brendan Barber, TUC general secretary, said: “As well as targeting aggressive tax avoiders, ministers must cut this multi-billion pound problem off at source by closing the many loopholes that the super-rich exploit.”