Ann Hansford

Factors Affecting the Costs of UK VAT Compliance for Small and Medium-Sized Enterprises

As firms grow, taxation and, in particular, value added tax (VAT), is one of the first areas in which they must deal with government regulations. It has been argued in the United Kingdom that regulatory requirements are burdensome and can even be a constraint on the development and growth of small and medium-sized enterprises (SMEs). The authors focus on SMEs and link the literature on VAT regulations and compliance costs to wider issues relating to SMEs. The costs of complying with VAT regulations are separated into core costs and total costs. Core costs are the mandatory costs that SMEs have to incur in order to comply with the VAT legislation and regulations. Total costs include VAT planning and one-off costs. For SMEs core costs represent a larger proportion of total compliance costs than is the case for larger businesses. A reduction in core costs would have a significant impact on the total VAT-compliance costs for SMEs. Factors expected to be associated with higher compliance costs are identified and tested in a multivariate framework. Empirical data were obtained from a survey of 4796 firms resulting in a final sample of 1085 firms and a response rate of 25.1%. Higher compliance costs (in absolute terms) are associated, inter alia, with increased turnover, newly registered firms, and increased complexity. Firms with higher compliance costs also perceived high psychological costs of VAT compliance. Compliance costs were also higher for individuals who did not have English as their first language, and individuals with special needs. The important implications of the findings for policy are highlighted.

Best Practice in Tax Administration

For effective and efficient value added tax (VAT) administration and practice, there must be a shared knowledge base and good communication between tax advisors and tax officers. Tax advisors and tax officers are key players in securing overall tax compliance. Should they develop an adversarial relationship through poor communication, then current and future noncompliance may increase. Communication problems and inconsistent advice may also lead to higher tax compliance costs borne by VAT traders. This viewpoint draws upon the results of a UK study of tax advisors, who are members of the Chartered Institute of Taxation, and tax officers, working for HM Customs & Excise, who are responsible for administering VAT. A preliminary study used group discussions in order to gain an insight into the concerns and frustrations experienced by both tax advisors and tax officers in their dealings with each other. There were six group discussions with tax advisors, and two with tax officers. Following completion of the group discussion phase, draft questionnaires were compiled incorporating some of the issues suggested by HM Customs & Excise at the outset of the research study. The questionnaires for each group were prepared along similar lines. The areas covered in both questionnaires were communication, complexity and VAT visits, together with a section of questions covering demographics and working environment. The questionnaires were sent in 1997 to 1,000 tax advisors and 529 tax officers. The Chartered Institute of Taxation database identified 304 VAT specialists and 250 of these were selected as part of the sample. The remaining 750 were selected randomly from the remaining membership. The response rate for both groups was approximately 50%. The tax officers who responded were more likely than the advisors to have over 75% of their workload relating to VAT. This is because the tax advisors in the study were also involved in other areas of taxation, for example personal and corporate work, in addition to dealing with VAT matters for their clients. Both tax advisors and tax officers are required to provide advice to taxpayers, and both sets of respondents were asked to assess the quality of the advice provided by the other group. Our findings show that the tax officers were more positive in their assessment about the quality of advice provided by tax advisors than vice versa (see table 1). In particular, tax officers were more likely to assess tax advisors as having greater confidence and knowledge, in comparison to tax advisors’ rating of the confidence and knowledge of tax officers. Less than half of the tax advisors agreed that tax officers provide confident, knowledgeable or consistent advice. A further concern is that 20% of each group assessed the quality of advice they received on most occasions as confusing.

Developments in tax e-filing: practical views from the coalface

Purpose - Electronic filing (e-filing) of personal tax returns has become a global trend in developed countries. An increasing number of individual UK taxpayers are seeking help from tax advisers as ambitious e-filing targets increase the interaction between taxpayers, tax agents and government departments. This article aims to review the attitudes to information and communications technology (ICT) adoption between these three groups. Design/methodology/approach - This article has partly built on the work of Walsh and White, who use Moores “Technology Adoption Life Cycle” to examine e-filing adoption by taxpayers and tax preparers in the USA. However, this article uses a mixed methodology that the authors argue is more suitable for the wider issues found in the UK. Findings - The results confirm that small/medium sized tax agent firms are more likely to be technology enthusiasts/early adopters of e-filing for their individual clients. As their business policies are more likely to be directly driven by technology enthusiasts, they have fewer issues with the incomplete e-filing system available at the early stages of its roll out and were more motivated by the visible benefits available from adopting e-filing. Larger firms have been slower and appeared more reluctant to embrace e-filing of personal tax returns being concerned that engaging in HM Revenue and Customs controlled systems and targets would compromise their internal systems, ICT integrity and control of complex tax cases. Practical implications - This split in e-filing attitudes by tax agents supports Moores “chasm” argument for technology adoption processes, implying solutions for widening participation found appropriate for other domains could be equally applicable in this domain. The article reflects on these findings and proposes practical solutions that build on prior research to assist the government in achieving the future ambitious targets for e-filing. Originality/value - This paper reports the results of a national survey of tax advisers, supported by follow-up interviews, addressing the development of e-filing for personal taxation in the UK.