Findings: Trade in the tax advantage?

The days of builders offering a lower quote for cash could be numbered if Customs and Excise take on board research from Exeter University, writes Caroline Davis.

People object to being "unpaid tax collectors" and resent surcharges for lateness, said Paul Webley, professor of economic psychology, who has researched rule breaking extensively. He suggested flipping the model - paying those who submit their returns on time and abolishing penalties for late payment. This would reduce the rewards for non-compliance and so encourage a voluntary VAT-paying culture.

Customs and Excise asked Professor Webley and research assistant Caroline Adams to investigate the underlying processes to help predict non-compliance. They interviewed 28 business owners in the Southwest and carried out two large surveys in the catering, flooring, furniture and building trades.

The team discovered that mental accounting - whether people consider VAT as part of their turnover or whether they consider it as being passed on to Customs and Excise - could be crucial. They found that the flooring trade was the least likely to perceive collected VAT as business turnover. They also found that building firms saw quotes including VAT as more of a competitive disadvantage than did catering businesses. VAT on food is rarely stated.

Other factors studied were how fair the system was believed to be, the image of Customs and Excise and how severe the penalties for non-compliance were perceived to be.

"If people could get away with it, they would," Professor Webley said. "But they do believe that the Inland Revenue and Customs and Excise will find out."

The United Kingdom is a relatively compliant nation - 1996 figures suggest only 3 per cent of VAT was uncollected. By contrast, Italy had up to 40 per cent of revenue uncollected and 66 per cent of French VAT payers had understated their taxable sales.

Professor Webley presented his findings at a recent conference in Canberra.