Are digital IDs a fraud shield or a faff for SMEs?

Last week, Keir Starmer announced a major government scheme to roll out digital ID for all UK citizens and legal residents. By the end of this Parliament, digital ID is set to become mandatory in Right to Work checks, partly to simplify the process.

The scheme has also been framed as a deterrent to illegal migration, with Starmer claiming that making access to work more difficult will discourage crossings of the Channel. He has described digital ID as “an enormous opportunity for the UK.”

Yet for many SMEs, concerns may lie less with controlling immigration and more with the practical impact of digitisation. Will digital ID genuinely streamline hiring, or will it place more barriers between businesses and the people they want to hire?

What is the new digital ID scheme?

The government’s new digital ID scheme will offer free, secure, and smartphone-based identity verification for UK citizens and legal residents.

In its official announcement, the scheme was positioned as part of the government’s anti-immigration stance, the idea being that stricter access to work will make the UK less appealing to people without legal status.

Beyond this agenda, the digital ID is a mobile-based solution, much like the NHS app or contactless payments, allowing workers to complete Right to Work checks (done to verify a candidate’s legal right to work in the UK pre-hire) without providing paper documents.

Digital ID may also reduce the risk of fraud. Data from the Centre for Finance, Innovation and Technology (CFIT) shows that more than eight in ten SMEs might pay for a Digital Company ID, as the tech could help reduce the £6.8bn lost to fraud annually in the UK.

Will it really stop illegal working?

While digital ID may be new, Right to Work checks were introduced decades ago, along with the current illegal working legislation, which has been in place since 2008. Despite this, illegal working still goes on.

On this point, Emma Brooksbank, Immigration Partner at national law firm Freeths, commented: “It is difficult to see how the Government’s proposal to introduce digital ID will make any difference to illegal working in the UK.

“Digital ID will simply mean that compliant employers need to adapt their processes, and those who choose to ignore the rules and employ people illegally will continue to do so.”

Her perspective highlights a crucial issue: despite decades of identity checks, many employers ignore the rules. And why would the introduction of digital ID change the behaviour of those already operating outside the system?

Instead, it will primarily be law-abiding SMEs who will be required to change their hiring processes. Mandatory digital ID may simply end up adding extra red tape for small businesses without delivering the promised ease.

There are also security concerns. While the IDs would be kept in a secure, encrypted digital wallet, experts warn that if the data is also stored centrally for cross-referencing, the system could become a hacking target, raising questions about how it complies with UK GDPR.

Alan Woodward, professor of cybersecurity at the University of Surrey, told The Guardian that an ID database is like “painting a huge target on something to say ‘come and hack me’.”

Implications of digital ID for SMEs

Digital ID is just one step in a number of larger smart data initiatives being rolled out by the government, which are intended to improve administration and transparency for SMEs.

This is in addition to other steps to monitor entrepreneurship, including tighter restrictions around ID at Companies House and the new Online Safety Act. There seems to be a clear theme: digital monitoring of businesses and workers is becoming the norm.

While the intentions behind digital ID may be rooted in preventing fraud and boosting efficiency, it may miss the mark. As experts note, illegal working is unlikely to be stamped out entirely, and the pressure of compliance may fall on businesses already following the rules.

For SMEs, the scheme could add unwanted complexity without delivering tangible benefits, another layer of bureaucracy at a time when many are already stretched thin.