This seems a rather pointless question to ask, and I suspect many people will reply “because we have to”. But is it as simple as that?

An Organisation for Economic Co-operation and Development (OECD) report this month looks at the willingness of individuals and businesses to voluntarily pay tax and how it can be improved through better understanding of the complex interlinkages between enforcement, trust in government and the ease of compliance.

The report called ‘Tax Morale: What Drives People and Businesses to Pay Tax?‘ is interesting to read for tax advisers and taxpayers alike. It considers the drivers behind compliance with tax obligations and focuses on developing countries where compliance rates are low.

Many developing countries face a range of challenges in increasing revenue domestically. These challenges include:

• a small tax base
• a large informal sector
• weak governance and administrative capacity
• low per capita income
• low levels of domestic savings and investment
• tax avoidance and evasion by firms and elites.

As a result, two-thirds of least developed countries still struggle to raise taxes equivalent to more than 15% of GDP, the widely accepted minimum to enable an effective state. In comparison, OECD member countries raise taxes, on average, close to 35% of GDP.

Apparently, compliance is not determined solely by tax rates or the threat of penalties, but rather by a wide range of socio-economic and institutional factors that vary across regions and populations.

Improving tax morale can contribute to efforts to overhaul the international tax rules and improve compliance by multinational enterprises and it may also improve the efforts to counter banking secrecy and tax evasion.

Tax morale is composed of several, interlinked, elements. A theory set out in the report posits that trust is driven by the degree to which the tax system, including the approach to facilitation and enforcement, is characterised as:

• fair
• equitable
• reciprocal
• accountable

As such, strengthening tax compliance is not only about improving tax enforcement and enforced compliance, but also about pursuing “quasi-voluntary compliance” through building trust and facilitating payments.

Why is this important?

The report states that a better understanding of what motivates taxpayers to participate in, and comply with, a tax system is valuable for all countries and stakeholders. Tax administrations can benefit from increased compliance and higher revenues, taxpayers (both businesses and individuals) are better served by tax systems that understand and are responsive to their needs, while increased data and discussion can help researchers deepen their understanding.

So…

In terms of VAT, what are our experiences of HMRC? Is it fair, equitable, reciprocal and accountable? Having discussed this at most client meetings where businesses have been challenged, and my experience in the department and advising businesses is: It used to be a lot better, there was a feeling that they were “trying to get things right”, however, this sense has been declining and trust is increasingly and rapidly being lost. Is this nostalgia, or does HMRC increasingly rely on bullying, ignoring contentions, misunderstanding or misapplying legislation or not being concerned with taxpayers?

All I would say here is that the fact that HMRC can issue a written ruling, but then go back on it if it suits them, is hardly fair or equitable. See here – no more “Sheldon Statement” protection for taxpayers.