Traders who are not VAT registered should be jailed if they add VAT to their customers' bills, according to a Conservative MP.
Ian Liddell-Grainger, chairman of the All-Party Parliamentary Taxation Group and Conservative MP for Bridgwater and West Somerset, said that the scam amounted to "blatant fraud", and that penalties for traders who cheat on VAT are "no deterrent".
Speaking on BBC Radio 4's Money Box programme, he said: "Everyone knows it is going on but it is hard to detect. Now VAT has gone up to 20% it will become much more high profile."
Currently, HM Revenue & Customs (HMRC) penalties for charging customers' VAT when you are not registered are usually double the tax charged, according to Liddell-Grainger, who said that this was not enough.
"If you've got a tax bill of £30, that is £60. In the worst cases it needs to be a custodial sentence, and certainly up to 10 times the tax," he said.
"This is blatant fraud. You are going into people's homes, lying and using your position to extort money out of people. In any other walk of life you would be jailed."
Any trader whose turnover exceeds £70,000 must register for VAT. Those with lower turnovers can do so if they wish.
VAT was increased from 17.5% to 20% on 4 January, 2011, amid concerns that the rise could help rogue traders as homeowners search for cash-only deals.