Changes in SME tax compliance costs 2004 to 2009: evaluation report 2
This report compares the self-reported tax compliance costs of SMEs provided in the baseline survey of 1,739 small and medium businesses (SMEs) in 2004 and the follow-up survey of 1,728 SMEs in 2009.
| Download this report |
|---|
|
Changes in SME tax compliance costs 2004 to 2009: evaluation report 2
If you would like to view this in an alternative format please contact: nationalresearchandevaluationunit@ird.govt.nz |
|
Disclaimer: The official electronic version of this report is provided in PDF format. We may also publish this document in other electronic formats to improve the accessibility of our information. While these alternative formats may have minor presentation changes, we make every effort to ensure the information is accurately converted. |
Executive summary
Purpose
An objective of undertaking the 2009 survey of tax compliance costs of SMEs is to measure the change in these compliance costs since 2004. The report addresses two key questions:
- Have SME tax compliance costs been reduced since 2004? If so, by how much?
- Which aspects of compliance costs have changed more than others: in relation to which revenues and compliance cost components? And for which businesses?
This report compares the self-reported tax compliance costs of SMEs provided in the baseline survey of 1,739 small and medium businesses (SMEs) in 2004 and the follow-up survey of 1,728 SMEs in 2009.
Context
The long history of tax policy and administration aimed at reducing and limiting the cost of complying for taxpayers is summarised in the timeline given at Figure 1.
In 2007, the workplace-based superannuation scheme KiwiSaver was introduced and created additional responsibilities for employers. To better understand the effect of KiwiSaver on overall tax compliance costs, it is treated separately from PAYE in this research.
Methodology
This report is based on compliance costs measured from two paper-based surveys mailed out to 5,000 SMEs in October 2004 and September 2009 respectively. These survey responses were linked with key Inland Revenue administrative variables for richer analyses.
The rigour of the analyses depends on the 2004 data being comparable with the 2009 data. Special care has been taken ensuring that the samples of businesses have the same parameters and that dollar values across years are comparable by a process of Inflation adjustment.
Converting internal time to a dollar values is based on hourly rates of three groups of personnel who spent time meeting their SMEs tax obligations. The following table shows the hourly rates applied to time to convert 2004 and 2009 hours to dollars.
Table 1.1: Value of time; 2004, 2004 inflation adjusted and 2009
| Personnel |
2004 unadjusted value |
2004 inflation adjusted value |
2009 | Source |
|---|---|---|---|---|
| Owners | $ 43.99 | $52.04 | $61.12 | SME Tax Compliance Cost Survey Respondents |
| Paid employees | $ 20.31 | $23.17 | $25.39 | Statistics New Zealand QES |
| Unpaid family/friends | $25.70 | $29.32 | $33.31 | SME Tax Compliance Cost Survey Respondents |
Independent advice from the business community, academia and subject matter experts were obtained for key methodological decisions taken. Additionally, the processes and computer programs used to generate the estimates were peer-reviewed.
Trimmed compliance cost means have been compared from 2004 and 2009. The trimming systematically removes the worst distortions that can result from a few extremely high values and deliver results more useful for detecting change over time than non-trimmed means. Note that the means are not additive.
Some definitions
A simplified version of the compliance cost definition as used in this report is
- Combined compliance cost = hours (converted to internal compliance cost) +
- external compliance cost + stress (as a measure of psychological cost)
Additionally, the following terms are used in this report:
- Internal compliance cost - the dollar value spent by businesses doing their tax from within the business. This is the product of the number of hours spent doing tax within the business with the hourly dollar value of labour for, either the business owner, or an employee or a friend/family member.
- External compliance cost - the dollar value paid by businesses to tax agents or advisors for tax services.
- Combined compliance cost - on a business level, the sum of internal and external compliance costs.
- Psychological cost - a self-reported score from a 7-point scale of stress levels associated with a tax. The higher the score, the more stressful the tax is. Psychological costs are referred to as "stress" in this report.
Figure 1: Selection of key tax changes relating to SME compliance costs
Larger version of image
Business sizes by number of employees
The following terms are used to categorise business size:
- Nil - no employees (excluding business owners)
- Micro - 1-5 employees
- Small - 6-19 employees
- Medium - 20+ employees
Distinction is made between cost figures for all SMEs and cost figures for businesses that deal with specific taxes. "All SMEs" refers to every business in the sample even though they may not pay all taxes. This allows for a New Zealand-wide view of SME tax compliance costs.
It is also of interest to look at costs for those businesses that deal with specific tax types. Whenever this is the case, the costs are appropriately described as such.
Findings for all SMEs
The main contributor to reduced costs is the 17.5% decrease in the number of hours (16.3 hours fewer) that businesses spend on tax especially the time spent by owners.
On the other hand, the main additional costs are KiwiSaver and an increase in the dollar value of time over and above inflation. For example, the value of owners' time increased 17.4% to $61.12 in 2009 (see table 1.1). So, whereas hours have reduced, the positive impact of this is neutralised by the increase in value of time.
External costs overall have not changed, though there is a significant reduction in relation to GST. On average, external costs are $1,639 in 2009.
These movements result in a reduction of 1.3% in the average tax compliance costs for all New Zealand SMEs from 2004 to 2009 to a total of $5,557 in 2009. This includes the additional costs introduced by KiwiSaver.
The overall change is an average - there have been both decreases and increases.
When looked at by tax type, GST had a moderate decrease and income tax a small one. PAYE had a moderate increase and FBT a large one, but predicated on a small base.
"Nil" and "medium" businesses have benefited the most and most consistently across different elements of compliance costs. An exception is PAYE for "medium" businesses which incurred a significant increase in cost. In contrast "small" businesses have experienced increased costs in most respects.
The level of stress level is a useful general indicator of the compliance burden, and stress with meeting all Inland Revenue requirements (excluding finding the money) decreased overall from 3.4 to 3.2 (on a 7-point scale). Stress (including finding the money) decreased in relation to provisional tax, GST and PAYE. It increased in relation to FBT but started from a low base and remains lower than for other taxes.
Table 1.2: Summary of changes in (trimmed) mean compliance costs 2004 to 2009, by component, tax type and by number of employees
| Change | Business size (number of employees) | ||||
|---|---|---|---|---|---|
| Nil |
Micro (1-5) |
Small (6-19) |
Medium (20+) |
All | |
| A. All SMEs | |||||
| Combined | -3.8% | -0.6% | 9.7% | -5.1% | -1.3% |
| Hours | -20.3% | -16.8% | 5.0% | -30.1% | -17.5% |
| Internal | -6.0% | -0.2% | 12.5% | -13.9% | -2.0% |
| External | 2.5% | -2.8% | 10.1% | 4.1% | 0.2% |
| B. SMEs with tax type obligations | |||||
| Income Tax | -5.2% | 0.5% | 2.0% | -5.9% | -3.2% |
| GST | 0.4% | -13.8% | 2.3% | -32.1% | -6.4% |
| PAYE | N.A. | 3.1% | 10.7% | 26.0% | 6.5% |
| FBT | 63.8% | 42.0% | 17.1% | 11.4% | 41.6% |
Base: A: All respondents regardless of whether they pay/file a particular tax type (excluding outliers).
Base: B: All respondents who pay/file a particular tax type (excluding missing information and outliers).
Findings by tax type
The high level results are:
- GST and income tax had reduced compliance costs.
- PAYE and FBT had increased compliance costs.
- Except for FBT and its very small base, all the changes were small or moderate, though there are some larger decreases and increases within these averages.
The details per tax type are many and reported in the full report. Table 1.2 looks at each tax type by business size, showing that there are some very different outcomes according to size of business, especially in GST and PAYE:
- GST - large decreases for "micro" and "medium" businesses but small increase for "small".
- PAYE - large increases for "small" and "medium".
Some examples follow of the more significant movements as a flavour of the level of understanding the research can provide.
Income tax
- Stress levels for meeting provisional tax requirements reduced from 3.9 to 3.5.
- Large percentage reduction in the hours that owners spend each year on income tax - -22.7% or 5.3 hours.
- Internal compliance costs decreased by $688 for "medium" businesses, while their external costs increased $377.
GST
- External costs decreased by $54 or by 15.8% to $287
- Employee annual hours reduced by 3.1 hours or by 30.1%
- Big reductions in "medium" businesses' internal costs, by $1,045 or 29.4%
- Big reductions in "medium" businesses' external costs, by $267 or 42.8%.
PAYE (exclusive of KiwiSaver)
- Combined costs increased by $75 or by 6.5% to $1,231
- Owner annual hours reduced by 3 hours or by 18.3%.
- An exception to the increases is "small" businesses' external costs which reduced by $67, or -40.9%.
FBT
- Stress levels for meeting FBT requirements increased from 2.5 to 2.8 points, most notably for "medium" businesses where stress levels increased from 2.8 to 3.5 points.
KiwiSaver
The details for SMEs paying KiwiSaver in 2009:
- SMEs internally spend 14.5 hours fulfilling KiwiSaver obligations.
-
Combined costs relating to KiwiSaver totalled by $705.
- Internal costs were $660.
- External costs were $47.
- Stress level is at 3.1 points.
- "Small" businesses spend the most on KiwiSaver, spending about $743, of that $695 is internal and $60 external.
Conclusion
In relation to the two questions posed by this work, we conclude that between 2004 and 2009 there has been a significant 17.5% reduction in the internal time SMEs spend on doing tax. This reduction includes the extra hours due to KiwiSaver. The levels of stress are less too. External costs remain steady. However, additional costs have been added through KiwiSaver and via an increase in value of time. Pulling all these components together, in dollar terms the reduction in hours, the increase in the value of time and the external costs average out to a 1.3% reduction in costs to $5,557 in 2009.
We cannot be definitive about the drivers of the reduced hours spent on tax and the reduced stress associated with this. For instance, the impact of the economic recession could work to increase or decrease compliance costs in ways we can only hypothesize. We have discounted some of the more obvious external reasons namely, differences in underlying SME demographic characteristics and inflation. We note that the many changes over recent years in tax policy and administration, whether aimed specifically at reducing the burden of tax or where this is consequential, are designed in ways to effect small but cumulative changes to minimise compliance costs. The reduction in time could well be the accumulation of the many improvements over the five years. The evidence at hand shows that this seems to be happening.
Date published: 30 Aug 2010
Back to top
