Understanding tax evasion by Small and Mid-Sized Businesses

The purpose of the research was two fold:

• Provide insight on the characteristics and attitudes of Small and Mid-Sized Businesses that engage in tax evasion, and how these link with actual behaviours, and
• Evaluate the likely impact of different approaches to prevent evasion, promote compliance, or respond to incidents of evasion, and inform understanding of what approaches would be most effective in changing behaviour.

An independent company carried out 45 semi-structured depth interviews (a mix of telephone and face-to-face) with Small and Mid-sized Businesses from a broad range of sectors, all were recruited on the basis that they were engaging (or had previously engaged) in tax evasion behaviours, and critically that these behaviours were deliberate rather than accidental.

Five core attitudinal variables appear to differentiate between types of businesses in terms of their engagement with (and drivers of) evasion behaviours;

1. Sense of citizenship: an individual’s core values and beliefs which are the foundation for evasion behaviour
2. Distinction between personal and business assets: the extent to which business affairs and assets are kept separate from an individual’s own (or family) affairs and assets
3. Perceived risk: both in terms of the risk itself, and the business’ ability to manage or mitigate risks
4. Perceived financial imperative or reward: the focus (i.e. business or personal) and strength of any financial drivers of evasion behaviours
5. Willingness to seek out or create opportunities to evade: the degree of strategic planning involved in evasion activity

The five attitudinal variables summarised above interact with external influences – namely, social norms, media noise, market pressures and agent use – to determine four core types of evader;

1. Unthinking evaders, for whom low level evasion is habitual, and often adopted without thought
2. Invested evaders, for whom evasion is seen as an unfortunate financial necessity in order to stay in business (where the end justifies the means)
3. Lifestyle evaders, for whom evasion enables a life-style otherwise out of reach, which they feel is justified by the taxes they do pay
4. Systematic evaders, where evasion is actively considered and integral to the business model

Across the four core types of evader, behaviours range from relatively infrequent, low value evasion (e.g. circumstantial use of business stock for personal benefit), to considered and systemic evasion (e.g. consistent overclaim of high value expenses, and complex evasion strategies).

Some agent use may serve to limit engagement in evasion behaviour, or agents may be unaware of the full extent of evasion taking place (particularly where the agent has been employed primarily to provide peace of mind).

However, where agents are used primarily to reduce taxes due, a minority may be complicit in evasion to some extent
Believability (or perceived likelihood of being penalised), understanding, and anticipated personal impact are critical to the successful design and implementation of approaches intended to promote compliance and prevent evasion. However, currently, a general lack of believability, understanding and anticipated consequences limit the impact of specific interventions tested.

The full report can be viewed on the .Gov website.