BENEFIT cheats could be given grants to start their own businesses as an alternative to prosecution, under a radical plan being considered by the government.

People claiming benefits while carrying out cash-in-hand work would be granted an amnesty if they agree to put entrepreneurial skills honed in the black economy to legitimate use.

The Scottish Council Foundation (SCF), the influential independent think tank that devised the scheme, believes the new businesses would boost the economies of some of the country’s most deprived areas.

Under the plan, “trusted intermediaries” would be sent into deprived communities to identify benefit fraudsters with marketable skills and encourage them to apply for start-up grants and loans. They would continue to receive benefit payments but would have to sign up to a repayment plan to give back the money they defrauded.

The strategy is being considered by the Department for Work and Pensions (DWP), which is responsible for benefit payments across the UK. “We want people to know that stealing from the public purse is not acceptable but would support any attempts that people make to get back into a legitimate lifestyle,” said a spokeswoman.

An estimated £72m is lost in Scotland each year through benefit fraud. Telephone hotlines have been set up to encourage the public to “shop” benefit cheats and the DWP is running a national £2.6m advertising campaign against benefit fraud.

A recent report by the National Audit Office revealed that benefit fraud in the west of Scotland had risen, with 8.5% of benefit payments in 2002 going to fraudsters.

Jim McCormick, a director of the SCF and author of the report, said the government strategy was not working. McCormick, who proposes the new strategy in a report on poverty in Scotland commissioned by the Joseph Rowntree Foundation, said: “We know that many people who are caught are back doing it within six months.

“If you go to any part of Scotland with a low rate of employment and scratch the surface there is a network of cash-in-hand activities, such as car repair, DIY, gardening or childcare,” said McCormick. “To stay in business these people have to identify a market need, who their customers are and who their competitors are. Those are the kinds of skills that could be sharpened further.”

McCormick said a distinction had to be drawn between people involved in “informal” cash-in-hand work, who should be offered help, and those involved in “illegal” activities such as drug dealing and loan-sharking, who should be prosecuted. “This would allow at least some of that economic activity to be brought out of the shadows and turned into legitimate businesses,” he said.

Alan Hogarth of the Confederation of British Industry in Scotland criticised the proposal as an attempt to give criminals a “leg up” over their law-abiding competitors.

“Why should these people be given assistance when their legitimate competitors are having to pay ever-increasing taxes and comply with increasingly complex legislation?” he said.

The Scottish executive communities department, which is responsible for tackling poverty, said it would also be considering the SCF report.

“We welcome the report and the contribution it makes to the overall debate on tackling poverty,” said a spokesman.

“We are always willing to listen to interesting ideas on how to make progress with our anti-poverty aspirations. We are determined to tackle the social, educational and economic barriers that create inequality and work to end poverty by tackling deprivation and social need.”

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