Small business VAT compliance drops as rate increases: SA study

How does the VAT rate affect compliance levels? A recent study suggests that a large VAT increase can negatively affect compliance amongst small businesses.

South African researchers surveyed small businesses about whether they would meet their tax obligations under specified conditions. The survey “found that small business entities are inclined to reduce the VAT liability when there is an increase in the VAT rate”. The authors surmise that business owners may calculate that there is more upside to evading VAT when the rate is higher, despite the potential penalties if they are caught.

Notably, the higher the increase, the higher the reported rate of non-compliance. The authors suggest smaller VAT increases could thus limit the rate of noncompliance. 

Any taxable person with revenue exceeding R1 million per year is obliged to register for VAT in South Africa.

Making VAT compliance cost-effective

It stands to reason that VAT compliance depends on a range of factors, from enforcement to ease of compliance.

In order to make VAT compliance simpler and more efficient, many tax authorities are moving to digital compliance systems. Digital compliance also makes VAT evasion easier to monitor.

The good news for businesses, at least according to a survey of UK businesses, is that digital VAT reporting is simpler, faster and less error-prone. However, there’s an important caveat. Digital VAT reporting is only more efficient when businesses have the appropriate software in place. 

The survey found that where businesses used software fully compatible with the UK’s Making Tax Digital system, they were more likely to find the benefits of the system outweigh the costs. On the other hand, businesses that used incompatible software were less likely to enjoy the benefits. In those cases, the hassle of MTD outweighs the benefits. 

As more policymakers move to fully electronic tax compliance, businesses should therefore ensure they have appropriate and up-to-date VAT compliance systems in place in order to enjoy more efficient VAT compliance and avoid problems down the line. 

There’s a more effective and efficient way to ensure your business is always fully VAT compliant, while maximising VAT recovery opportunities. Get in touch with VAT IT, the world’s VAT refund and compliance specialists, for the technology and support you need to fully optimise your VAT compliance.