Value-added tax (VAT) constitutes the third largest source of revenue for the Organisation for Economic Cooperation and Development (OECD) countries (Gale, Gelfond & Krupkin 2016). Compared to other tax types, VAT is relatively a new type of tax. It was introduced for the first time in France in 1948 and today, approximately, 160 countries around the world levy VAT (Erero 2021; Gale et al. 2016). Countries introduced VAT for several reasons. Value-added tax is less susceptible to volatility compared to other tax types (Erero 2021). Furthermore, VAT is arguably less vulnerable to fraud because it is remitted to revenue authorities at each stage of the production process (Gcabo et al. 2019; Kowal & Przekota 2021).

Value-added tax continues to be an important source of revenue for countries that are dealing with fiscal consolidation pressures while seeking to restore economic growth (Owens 2011). Value-added tax is a broad-based system that is levied on the local consumption of goods and services (SARS 2021). The consumption nature of VAT has demonstrated its ability to raise government revenue in a neutral and transparent manner (Owens 2011).

Prior to the introduction of VAT, most consumption taxes were in the form of retail sales taxes (Charlet & Owens 2010). In contrast to VAT, where traders levy output VAT on sales and claim input VAT on purchases, retail sales tax is imposed on consumption at the time of the final sale (OECD 2017). Although the ultimate VAT burden is carried by the final consumer, VAT is collected at each stage of the production process, which inherently includes qualifying small businesses (Owens 2011).

In South Africa, VAT was introduced in 1991 to replace general sales tax (GST) as an indirect system of taxation. The contribution share of VAT to the South African government tax revenue amounted to 25% for the 2021/22 fiscal year (SARS 2022). In this regard, VAT has become the second-highest source of government revenue (SARS 2022). South African small businesses with a turnover of up to R20 million per annum represent the largest share of the number of registered VAT vendors, at 185 295. This constitutes 83% of all registered VAT vendors (SARS 2022). This translates into small businesses with a turnover of up to R20 million contributing R32 037 million in net VAT payments to the government tax revenue (SARS 2022). This constitutes 26% of total net VAT payments for the 2021/22 fiscal year (SARS 2022), making them a useful unit of analysis for research. These statistics suggest that small businesses with a turnover of up to R20 million per annum play an important role in the tax revenue collection for the state. Thus, compelling scholars and practitioners to understand key challenges that small businesses face in VAT compliance. A highly useful lens is to probe these challenges through the lens of tax practitioners who wrestle with, and translate, the intricacies of VAT, for small business owners (SBOs).

Notwithstanding the enormous contribution that small businesses make to tax revenue in the form of VAT collection, research shows that they face unique challenges which often stretch the SBOs’ limited resources, constraining their business development. A study undertaken among small businesses by Naicker and Rajaram (2019) found that 51.8% of the small business participants ranked VAT to be the most complex tax. Furthermore, Smulders (2013) found that VAT is the most burdensome tax, followed by PAYE and income tax. Evans et al. (2014) endorsed this view and further claimed that VAT or GST carried the highest tax compliance costs, compared to other tax types.

This study is therefore motivated by previous research that demonstrated that VAT is the most challenging form of taxation and therefore strongly warrants additional theorisation (see Evans et al. 2014; Naicker & Rajaram 2019; Smulders 2013). Naicker and Rajaram (2019) recommended that the South African Revenue Service (SARS) ought to invest resources into finding alternative solutions to assist small businesses with VAT compliance. Studies thus far have followed quantitative methodologies and, to date, this is one of few studies using qualitative insights (Evans et al. 2014; Naicker & Rajaram 2019; Smulders 2013). A qualitative methodology was chosen to achieve the aim of the study, which is to understand key challenges encountered by SBOs pertaining to VAT compliance. The qualitative methodology allowed the researchers to dig beyond surface issues, garnering a concentrated and human-centric view of what is often treated as only an operative legalistic mandate. The main question, therefore, guiding the study is: what are the key challenges encountered by SBOs regarding VAT compliance?

The intended contribution of this article is to extend theory and inform further research, policy-making and everyday practice, using a participatory bottom-up approach. The remainder of the article is structured as follows: the ‘Literature review’ section delineates the topic of small business VAT compliance in the context of existing literature, setting up the theoretical impetus for the study. In the ‘Research methodology’ section, the researchers discuss the research methodology employed to answer the research question. The ‘Findings’ section presents findings and discusses their implications. The study presents conclusions inclusive of recommendations for researchers, policymakers and practitioners.

Value-added tax is a consumption tax, charged on the difference between a business’ sale of goods and services and its purchase of inputs from other businesses; it represents the tax on the value added to goods or services (Gale et al. 2016). Value-added tax compliance entails the accurate submission of tax returns including the payment of the VAT liability in a timely manner in line with relevant tax legislation (OECD 2004).

Mascagni et al. (2023) argued that VAT is a sophisticated tax because it is complex to administer. The implementation of multiple VAT rates impacts the efficiency of the VAT system, while also increasing the complexity, resulting in increased administrative and compliance costs (Charlet & Owens 2010). The use of a single standard rate is instrumental in reducing the complexity of the VAT system (De la Feria 2013), a necessary attribute to support small business tax compliance. Although a single rate is used in many countries, including South Africa, there are other exceptions such as exemptions and zero rating of certain goods and services. The zero rating of certain goods and services is aimed at offsetting the regressivity of VAT and thus lowering the burden of this tax on low-income families (Gale et al. 2016). On the other hand, exemptions are warranted for certain goods and services, because they are hard to tax (such as financial services) or are merit goods (such as education) (Parliamentary Monitoring Group 2011).

As it pertains to SBOs, researchers found concerns regarding confusion and administrative difficulty, particularly relating to input tax claims and net refunds (Mascagni et al. 2023). Although it may be straightforward when it comes to the levying of output tax, there are many rules that govern the deductibility of input tax on purchases. For instance, there are certain goods and services that are not eligible for input tax deduction such as salaries, fuel, entertainment costs and certain motor vehicles, among others (Value-Added Tax Act 89 of 1991: Sections 1, 17). Certain supplies are exempt from levying of output tax, such as financial, education and transportation services among others, with the implication that expenses incurred to produce these goods and services will not be eligible for input tax deduction (Value-Added Tax Act 89 of 1991: Section 12). In this regard, a study undertaken among small businesses by Naicker and Rajaram (2019) found that 51.8% of the participants ranked VAT to be the most complex tax.

Furthermore, concerns have been raised about tax compliance costs regarding VAT as it relates to small businesses. Research has shown that tax compliance costs are regressive, the smaller the business, the more cumbersome the relative burden (Matarirano, Chiloane-Tsoka & Makina 2019). More so, tax compliance costs are higher for newer businesses as confirmed by studies carried out by DeLuca et al. (2007); Evans et al. (2014) and Smulders and Stiglingh (2008). A comparative analysis of internal tax compliance costs per tax type for small businesses in Australia, Canada, South Africa and the UK was conducted by Evans et al. (2014). This comparative analysis found that in three of the four countries VAT or GST was regarded as the most burdensome tax in terms of tax compliance costs compared to other tax types (Evans et al. 2014). Smulders (2013) also reported that VAT is the most burdensome tax followed by PAYE and income tax as mentioned in the Introduction.

There are three ways that governments often exploit to reduce the burden linked to VAT compliance. Firstly, there is less frequent filing of tax returns and payments. Secondly, there is the cash basis of accounting. Lastly, there is the presumptive input tax calculation (Zu 2018). In South Africa, less frequent submission of tax returns is applied to a very limited extent by vendors consisting solely of agricultural, pastoral or other farming activities with a turnover limit of R1 million over a 12-month period (Value-Added Tax Act 89 of 1991: Section 27). The cash basis of accounting is only applicable to vendors who operate as sole traders or partnerships or unincorporated persons with an annual turnover of up to R2.5 million (Value-Added Tax Act 89 of 1991: Section 15). South Africa does not currently utilise the third way mentioned to reduce the tax compliance burden, namely presumptive input tax calculation. The only presumptive tax that is available to small businesses in South Africa is in the form of a turnover tax, which is applicable to businesses with a turnover of R1 million or less (Income Tax Act 58 of 1962: Schedule six).

The preceding discussion demonstrates that many small businesses with a turnover of between R1 million and R20 million contend with the same requirements that are expected from large corporations. One million Rand is the compulsory VAT registration threshold, although some small businesses register voluntarily with a turnover of less than a million. From this point of view, SBOs who feel that they are being treated unfairly may have a valid point because large corporations have systems, infrastructure and a qualified staff complement in place to deal with the increased tax compliance burden and make judgements regarding input tax deductions among others.

Of course, most countries employ a threshold that exempts small businesses from registering for VAT. The registration threshold significantly reduces the number of tax returns that must be filed as well as the level of bookkeeping required (Brashares et al. 2014). This significantly reduces the tax compliance costs, which have been proven to be regressive, and the administrative costs that revenue authorities incur to collect the tax (Brashares et al. 2014). In addition, having a threshold, may, in certain instances increase the net VAT collected by the revenue authorities as many small businesses receive refunds as well as pay little tax (Brashares et al. 2014).

The current study is underpinned by the theory of mental accounting in conjunction with the theory of planned behaviour. The theory of mental accounting is particularly important to the concept of agency for VAT purposes (the understanding that the SBOs collect VAT on behalf of SARS), while the theory of planned behaviour is instrumental in understanding the influence of challenges and attitudes towards the VAT compliance behaviour of SBOs.

The theory of ‘mental accounting’ refers to ‘the cognitive processes that individuals use to keep track of and group (monetary) costs and benefits’ (Kamleitner, Korunka & Kirchler 2012:338). Mental accounts entail ‘frames for outcomes that influence the perception of these outcomes’ (Kamleitner et al. 2012:338). Vendors, in effect, act as agents who collect VAT from their respective clients and remit it to SARS (Schoeman, Evans & Du Preez 2021). However, SBOs often perceive the VAT money as their own (Adams & Webley 2001; Webley 2004). This perception, in part, also sets up the logic for the research problem of this study.

Taxpayers who book the VAT portion into a separate mental account may find it easier to hand over the tax to revenue authorities (Webley, Adams & Elffers 2002). On the other hand, taxpayers who do not book the VAT portion into a separate mental account and who perceive it to be their own may find it hard to remit it over to revenue authorities (Webley et al. 2002). There is thus a positive relationship between mental accounting of taxes and voluntary tax compliance (Mutanga et al. 2021).

The theory of planned behaviour is a theory intended to predict and explain human behaviour in specific situations and it is centred around three conceptually independent causes of intention (Ajzen 1991). These three conceptually independent causes of intention are the attitude (favourable or unfavourable) of a person towards the behaviour in question; the perception of societal pressure to perform or not perform the behaviour, referred to as subjective norms; and the perception of how easy or difficult it is to perform the behaviour, referred to as perceived behavioural control (Ajzen 1991). A positive attitude towards tax compliance behaviour joined with the required opportunities, resources and societal pressure may lead to success in performing the intended behaviour (Ajzen 1991). The perception of how easy or difficult it is to perform a certain task will be influenced by past experiences and expected challenges (Ajzen 1991). The theorist argues that people’s behaviour is influenced by their confidence in their ability to perform it (Ajzen 1991). The three concepts of this theory, therefore, signal why the lens of tax practitioners is a useful one because tax practitioners mediate for SBOs around these concepts. The ‘Methods’ section explores the research methodology employed to achieve the aim of the study.

The study employed a qualitative research methodology. The epistemological stance adopted in this study is interpretivism. Semi-structured interviews were utilised as the method for data collection. A qualitative research methodology allowed the researchers to comprehend the context, phenomena and experiences of tax practitioners in their journey of assisting small businesses with VAT compliance (Cleland 2017; Islam & Aldaihani 2022).

The target population for the study included tax practitioners who service small businesses that meet the following inclusion criteria: (1) a turnover not exceeding R20 million; (2) registered for VAT and (3) operating in the economically vibrant Gauteng province of South Africa. A combination of purposive and snowball sampling techniques was employed to select the participants. This is because participants in a qualitative study must be carefully selected to be individuals who have deeply experienced the phenomenon under consideration (Creswell 2007). Sandelowski (1995) recommends a sample size of 10 for a homogenous population. In the current study, data saturation served as a guide in the determination of an adequate sample size. The sample size was increased to 22 tax practitioners because the researchers made a decision to probe further as they were of the opinion that the analysis was under-formulated and called for an increase in participants. The relevant characteristics of each of the 22 tax practitioners are listed in Appendix 1.

Themes arising from the literature review were utilised to develop the interview questions. The interview questions are included in Appendix 2. The length of the interviews with the tax practitioners ranged between 40 min and 1 h 17 min with an average time of 1 h and 6 min. The study followed the ethical approval granted by the North-West University’s Economic and Management Sciences Research Ethics Committee (EMS-REC) (ref. no. NWU-00616-20-A4). For methodological richness, the research team also included an independent coder (Williamson et al. 2020) and a transcriber.

The results of this study are presented thematically. The first step in the data analysis process involved the preparation of the transcripts. The researchers checked the accuracy of the transcripts by listening to the digital audio files, while at the same time reading the transcripts. This process kept the researchers close to the phenomena and afforded them the opportunity to re-live the interviews.

The second step in the data analysis process involved a process whereby the researchers repeatedly read the transcripts and reflected on the text again, this time with the aim of assigning codes. During this process, five levels (rounds) of coding emerged, namely: (1) holistic coding; (2) separating the data into manageable parts; (3) highlighting significant statements; (4) assigning codes to the significant statements (line by line coding) and (5) assigning codes to a paragraph containing a significant statement. An inductive approach to coding was followed. As a result, most of the codes were data-driven. The aim was to elevate the voice of the tax practitioners by allowing the primary data to speak for itself. These coding cycles were compared and confirmed or newly informed by the independent coder.

The third and last step in the data analysis process entailed the development of themes from the first cycle codes. This was done through ongoing dialogue and engagement with the first-cycle codes. During this process of developing themes, the first cycle codes were reorganised and reconfigured to generate a list of categories. Several categories were thereafter probed and reflected upon to form sub-themes. The sub-themes were brought together and analytically aggregated, through inductive means and the use of the theories to form the themes that are discussed here.

Research shows that VAT is the tax type that small businesses struggle with the most when compared to other taxes such as income tax (see Evans et al. 2014; Naicker & Rajaram 2019; Smulders 2013) as already noted in ‘Introduction’ and ‘Literature review’ sections. Therefore, the current article explores the challenges identified by tax practitioners as it pertains to small business VAT compliance.

The data analysis process resulted in four themes. Firstly, the participants in this study raised concerns associated with the concept of agency for VAT purposes. Secondly, the study found that the requirement to account for VAT on an invoice basis is particularly challenging for small businesses because SBOs are not always paid on time by their clients. Thirdly, at the compulsory registration threshold of R1 million, the researchers noted that some of the businesses are not yet ready to deal with the tax compliance burden linked to VAT as their stretched resources are devoted to keeping the business running. Lastly, the researchers found that SBOs associate VAT with constant cash outflows and almost resent this fact. This is especially the case for small businesses in the service industry, as they do not have enough input tax to offset the output tax. Each of the themes is deliberated in this section.

This article has shown the layers of VAT compliance challenges for over-stretched SBOs. The discussion also highlighted that the theoretical lenses of mental accounting and the theory of planned behaviour have uncovered the multiple-layered nature of challenges encountered by SBOs in response to the research problem and central question. The insights of tax practitioners combined with the theory of mental accounting and the theory of planned behaviour lifted the discussion beyond surface issues, garnering a concentrated and human-centric view of what is often treated as only an operative legalistic mandate.

The analysis leads to several policy and practical recommendations. Regarding policy recommendations, the South African government must consider compelling, through legislation, medium to large corporations including the state and its departments to pay small businesses on time. Although it would be helpful to allow small businesses to account for VAT on a payment basis, it would however create an imbalance in the VAT system, wherein, the input tax and output tax for the same invoice are accounted for at different stages. Thus, paying small businesses on time is the most viable solution. The VAT registration threshold has not been adjusted for inflation for years. At the registration threshold of R1 million, small businesses are not able to cope with the VAT administrative burden. In this regard, the National Treasury ought to consider increasing the compulsory registration threshold.

As it pertains to practical recommendations, more awareness and educational initiatives are needed to educate small businesses about the concept of agency for VAT purposes. Small business owners must be aware that the VAT portion of the invoice belongs to SARS. Furthermore, large corporates need to be made aware of the administrative burden linked to VAT especially as it relates to small businesses. This is so that they may refrain from compelling small businesses to register for VAT before they reach the R1 million compulsory registration threshold. Furthermore, SARS ought to consider making accounting software that complies with tax regulations either free of charge or at a marginal cost accessible to SBOs. Small business owners who are registered for VAT must be encouraged to buy from VAT vendors to enable them to claim input tax. Additionally, in order not to forego legitimate input tax deductions, SBOs must be educated about what constitutes a valid invoice.

The current study provides insights into the challenges that small businesses encounter regarding VAT compliance. This study was conducted with tax practitioners; therefore, a future qualitative study may be conducted with SBOs who are registered for VAT and who do not outsource VAT compliance to tax practitioners. As with any other study, qualitative research has its limitations. Because of the small sample size, the findings of this study cannot be generalised to the broad small business community. For this reason, a quantitative study may be undertaken in future with either tax practitioners or SBOs to determine the extent of these challenges among the broader small business population.