The internal costs of VAT compliance: evidence from Australia and the United Kingdom and suggestions for mitigation

Existing literature has established the regressive nature of tax compliance costs, and in particular, the compliance costs associated with indirect taxes such as value added taxes (VAT) (known in Australia as Goods and Services Tax (GST)). Costs of compliance impact on the willingness of taxpayers to comply; they influence the relationship between taxpayers and the tax authority; and they also impact on the trust relationship in tax administration. The small business sector is a key player in the tax system and is critically important to maintaining the integrity of the system and cooperation between business and the revenue authority. This article focuses on one specific aspect of tax compliance costs: the internal (time) costs of compliance borne in the small business sector in relation to VAT/GST. It notes how such compliance costs vary significantly between Australia and the United Kingdom (UK), both of which have been the subject of recent detailed analysis. The article examines possible causes for the variations in internal tax compliance time spent on dealing with the VAT/GST that are evident in these comparable regimes. If certain design features of a VAT/GST system trigger compliance costs, changes to the design that might alleviate those costs should be considered.