A recent report published by HMRC in the UK – research report 433 – has looked at the causes of small and medium-sized businesses to evade tax, and has sought to identify if holding particular beliefs or attitudes makes people more likely to indulge in tax evasion.
The report “Understanding evasion by small and mid-sized businesses” was conducted on a relatively small sample size (40 small and 5 mid-sized businesses), so may not be indicative of more widely held beliefs. Furthermore, as it focused on those businesses which were actually engaged in tax evasion, the findings do not mean, statistically, that such practices are common.
Nevertheless, the report does identify a number of differing attitudes which distinguish evading from non-evading businesses, including:
- Sense of citizenship – an individual’s core beliefs and values;
- The ability to distinguish and respect the difference between business and personal assets – the extent to which what belongs to a business is kept separate from what belongs to an individual;
- The perception of risk – both in terms of the risk itself and the ability of the business to manage that risk;
- The prospective financial incentive or reward (the amount of tax which could be evaded); and
- The willingness to actively seek or create opportunities for tax evasion; the degree of strategic planning which goes into evading activities.
From there, the report links these attitudinal variances to external influences, such as social norms, media coverage, and market forces, to identify four main types of tax evader.
- The Unthinking Evader – those who habitually indulge in low level tax evasion without conscious thought almost;
- The Invested Evader – businesses which regard themselves as driven by financial necessity to evade tax in order either to survive or grow;
- The Lifestyle Evader – those who regard tax evasion as a way of having a lifestyle that they could not otherwise afford, and justify their actions by pointing to the tax that they actually do pay; and
- Systematic Evader – as the name suggests, those who actively contemplate tax evasion and make it an integral part of their business model.
The sort of evasion recorded in the report ranges from businesses who deal in cash in order to under-declare income, to others which “employ” teenage children who do not really work but whose personal allowances are used to save tax. Then there are those business owners who claim personal expenditure items as business expenses, and others who have bought assets for the business, such as computers, and then taken them home for personal use.
Many of these examples are small in themselves; however, added-up they can represent a large tax loss to the economy. And, while the HMRC report is focused on the UK, such practices are common in many other economies and may be even more rife.