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.
