Record Keeping Practices and Tax Compliance of SMEs

Abstract

This paper reports upon a research project which was designed to explore the relationship between the record keeping practices of small businesses and their potential exposure to tax and related business compliance problems. It was hypothesised that these problems might include increased tax audit exposure (combined with the potential for adverse tax audit outcomes where record-keeping practices are poor), higher tax compliance costs, and greater liquidity and cash flow problems that cause difficulties in remitting taxes collected on behalf of the Australian Taxation Office (ATO) which can lead to business failure. The paper examines these issues and suggests that although there are a number of links between small business record keeping practices and tax compliance issues, these links are neither as straightforward nor as strong as the initial hypotheses might have suggested. The research used a mixture of qualitative (focus group) and quantitative (survey) methodologies and involved more than 500 small business owners and managers, over 300 tax practitioners, and a small number of ATO auditors.

Overall, the research showed that there was some dissonance between perceptions and reality. All of the key stakeholders - SME owners/managers, practitioners and ATO auditors - perceived (to varying degrees) direct relationships between poor SME record keeping practices and adverse tax compliance outcomes. But those perceptions were not always confirmed by the evidence of actual behaviour. Poor record keeping did not, of itself, necessarily lead to a higher vulnerability to audit (though once audited SMEs with poor records were more likely to suffer adverse audit outcomes). Nor did poor record keeping necessarily translate to higher compliance costs (though the data were ambivalent). Nor, finally, did poor record keeping necessarily lead to liquidity and cash flow problems.

The outcomes of the project suggest that further and more detailed research is required to explore these complex relationships. The current project was ambitious in its scope, and was ultimately limited in its findings by its reliance on the self-assessment of the quality of record keeping practices by SMEs themselves. Further research should be narrower in focus. For example, separate projects should investigate each of the three compliance relationships (audit; compliance costs and liquidity) with record keeping practice. In addition, future research should seek more objective measures of the quality of SME record keeping practice, utilising evaluations by advisers (as originally intended in this project) and by the researchers themselves.

Keywords: SME, record keeping, tax compliance

JEL Classification: H20