Lessening the Tax Burden: The Stress of Compliance for Small Businesses

I. Executive Summary
To run a small business in any country, the owner or manager of the business will be
continually faced with an array of compliance related costs. These costs of compliance
are given authority by government legislation such as the Income Tax Act 2007, and
tend to be majorly over complicated. Compliance costs, specifically tax compliance
costs, has become a major issue for small businesses because of the complex rules and
regulations associated with the legislation and small businesses, who lack resources, are
majorly disadvantaged.
1

For the purposes of discussion in this report, the category of small business will
be divided into three categories. First we have the small business, with a maximum of
fifty employees. Then we have micro (and nil) businesses, who have zero employees
and are not registered for GST. This is to align with the recent study by NZICA whose
final solution will be analysed and serve as a crutch to developing a new, simplified tax
payment method for small businesses.
2

This report will be looking into what makes up a compliance cost, and why
small businesses are facing a disproportionately higher compliance burden than larger
companies.
3
To do this, we will look at the way small businesses deal with their
compliance costs and the several different factors involved with paying taxes. This
report will take the point of view that costs of compliance need to be simplified because
of the fact that almost 90% of businesses in New Zealand are small businesses and play
a major role in influencing the economy.
4

Financing is an important concept in understanding small businesses and their
motivation. The report will look at the different financing methods used by businesses
to understand how it effects the growth of small businesses. One of the issues of
compliance costs that have been identified is the lack of growth of small businesses
because of the pressure of compliance therefore we need to implement strategies to
encourage certain types of financing methods to encourage growth.
On the 1st of April, 2014, the Tax Administration (Financial statements) Order
of 2014 came to effect. Its purpose was to ease compliance rules for small businesses.
Compliance regulations have always been an issue as many small businesses lack the
ability to efficiently meet the requirements with limited resources.
5
The complexity of
legal rules is generally only befitting larger companies who have resources readily
available to comply. One such matter of compliance is created by the Income Tax Act

1
W Robert, J Alexander, John D Bell and Stephen Knowles Quantifying compliance costs of small
businesses in New Zealand (2005) 39 NZEP 37.
2
Simplifying the Taxation of Small Business in New Zealand (NZICA, Wellington 2012
3
As above at n 1.
4
As above at n 1 at 39.
5
Anne Hansford, John Hasseldine and Carole Howorth Factors affecting the costs of UK VAT
Compliance for Small and Medium-Sized Enterprises (2003) 21 Government and Policy 479.
2007 (The Act), which lays down the taxation requirements for New Zealand entities.
The Act is overly complicated, and has seen many major changes and reforms in the
past few decades. Because of its complexity, many small businesses outsource their
financial work to accountants, thereby increasing their External and Total compliance
costs. The 2014 Order aims to simplify the requirements set out in the Income Tax Act
so that small businesses are able to comply better and with less strain.
6

The report will then move on to discuss research studies of the past decade, both
in New Zealand and in other jurisdictions, such as the United Kingdom and Australia,
which have shown that many small businesses bear a disproportionately high level of
cost when it comes to compliance.
7
Not only do they spend more money on average to
meet compliance regulations, but they spend more time on it too. The New Zealand
Government has attempted several times to reform tax regulation for small businesses to
ease the burden and encourage growth, but the effect of any such change has been
minimal.
This report will attempt to illustrate the issue of Tax Compliance costs, for small
businesses and discuss whether the 2014 Order will likely be able to create a positive
change for small businesses. We will also identify other solutions for change, such as
those recently suggested by NZICA, potentially new forms of Tax Credits for small
businesses and business banking changes to promote financing for small businesses.



6
Tax Administration (Financial Statements) Order 2014, s4, 5.
7
Binh Tran-Nam, Chris Evans, Michael Walpole and Katherine Ritchie Tax Compliance Costs:
Research Methodology and Empirical Evidence from Australia (2000) 53 National Tax Journal 229.