Microfoundations of Small Business Tax Behaviour: A Capability Perspective
| Author | Martina Battisti,David Deakins |
| DOI | http://doi.org/10.1111/1467-8551.12244 |
| Date | 01 July 2018 |
| Published date | 01 July 2018 |
British Journal of Management, Vol. 29, 497–513 (2018)
DOI: 10.1111/1467-8551.12244
Microfoundations of Small Business Tax
Behaviour: A Capability Perspective
Martina Battisti and David Deakins1
University of Portsmouth Business School, Richmond Building, PortlandStreet, Portsmouth PO1 3DE, UK
1Lancaster University Management School, Lancaster LA1 4YX, UK
Corresponding author email: martina.battisti@port.ac.uk
Small business tax behaviour has received surprisingly little attention. Weargue that an
organizational capability perspective using microfoundations will allow us to better un-
derstand the relationships between dierent drivers and the dynamics of small business
tax behaviour. This study draws on in-depth interviews with 42 small business owners
who are matched with the firms’ factual tax compliance status. Using grounded theory,
we build a framework that (a) identifies dierent microfoundations of small business ca-
pability to manage tax and (b) explains the dynamic nature of the relationship between
organizational capability and compliance. Findings suggest that high capability does not
necessarily translate into high tax compliance and this relationship is mediated by the
owner-managers’ perceptions of taxation as well changes in the economic and regulatory
environment.
Introduction
Although small business tax compliance has at-
tracted the interest of researchers for many years,
the findings remain fragmented. Instead, the exist-
ing literature emphasizes a variety of determinants
of tax compliance that reflect a similar variety
of disciplinary perspectives such as economic,
political and socio-psychological perspectives
(Batrancea, Nichita and Batrancea, 2013;
Kamleitner, Korunka and Kirchler, 2012; Kirch-
ler, 2007). Empirical findings on the determinants
of tax compliance are mostly mixed which is
indicative of a wider methodological problem –
the prevailing use of self-reported compliance
behaviour or compliance intentions by small
businesses owners instead of factual compliance.
Lastly, the dynamic and changing nature of small
business compliance has not been suciently
This research was made possible through funding pro-
vided by the Royal Society of New Zealand’s Cross
Departmental Research Pool, involving contributions by
the Ministry of Business, Innovation and Employment
and the Inland RevenueDepartment.
acknowledged to date. Kitching, Hart and Wilson
(2015) call for regulation to be considered as a
dynamic force that allows for variations in how
firms respond. In this study, we argue that tax
compliance behaviour is a result of the dynamic
interaction between the firms’ capability, the
owner-managers’ experiences with and percep-
tion of the tax system as well as the external
environment.
To address these shortcomings, we use an or-
ganizational capability perspective to identify the
microfoundations of small business capability to
manage tax while at the same time allowing us to
explore the dynamic nature of the relationship be-
tween capabilityto manage tax and compliance. In
this study, we conceptualize small business tax be-
haviour as an organizational capability that drives
the compliance outcome. Building on in-depth in-
terviews with 42 small business owners in New
Zealand that are matched with the firms’ factual
tax compliance status, we argue that the nature
of the relationship between the organizational ca-
pability and compliance outcomes is determined
by managerial cognitions of taxation as well
as the external environment. Using a grounded
© 2017 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
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498 M. Battisti and D. Deakins
theory approach, we developa framework of small
business tax behaviour that shows that the capa-
bility to manage tax and actual compliance are
two separate issues and that high organizational
capability does not necessarily translate into high
compliance.
Small business tax compliance
Previous studies of small business tax compli-
ance have tended to avoid definitional matters as
most studies focus on perceived and self-reported
compliance compared to factual compliance. Tax
compliance broadly refers to the extent to which
taxpayers meet their regulatory obligations in re-
lation to registration in the system, filing of tax-
ation information, reporting of complete and ac-
curate information and paying of taxes on time
(OECD, 2004, 2012). Braithwaite (2009) defines
tax compliance as the full payment of all taxes
due which implies that obligationsin all areas have
been met. This behavioural definition is relevant
for our study for two reasons. First, it focuses on
the tax compliance behaviour of small businesses
rather than the underlying intentions which can
be voluntary or the result of enforcement activities
by authorities (Kirchler, 2007). Second, it consid-
ers tax compliance in its entirety – from registra-
tion through to payment. It follows that tax non-
compliance refers to any dierence between the
amount of taxes paid and the amount of taxes due
(Braithwaite, 2009) and therefor only refers to not
meeting the last of the four obligations – payment.
Review of research on small business tax
behaviour
Tax compliance has been looked at from predomi-
nantly three perspectives: an economic, a political
and a socio-psychological perspective (Batrancea,
Nichita and Batrancea, 2013; Kirchler, 2007).
From an economic perspective, tax compliance
behaviour is driven by audit probability, fines, tax
rates and income. Recent reviews by Batrancea,
Nichita and Batrancea (2013) and Maciejovsky,
Schwarzenberger and Kirchler (2012) suggest that
empirical results on the impact of these economic
determinants on tax compliance are, at best,
mixed. Small businesses owners are therefore not
fully rational utility maximizers whose behaviour
is a reaction to financial cost and benefits consid-
eration. Overall, it is clear that the phenomenon is
simply too complex to be explained by economic
variables only. From a political perspective, tax
compliance behaviour is driven by fiscal policy
and the complexity of the tax law and tax sys-
tem (Batrancea, Nichita and Batrancea, 2013;
Kirchler, 2007). Increased complexity means that
taxpayers do not have sucient control to ensure
that all required tasks are successfully completed
because of a lack of awareness and understand-
ing of the regulatory processes and systems
(Langham, Paulsen and Haertel, 2012). For small
businesses complex filing procedures were found
to be a key driver of tax non-compliance (Atawodi
and Ojeka, 2012). The uncertainty caused by com-
plex tax laws and systems also has another eect
– it increases the use of accountants, tax agents
and other professionals to provide expert advice.
The importance of this relationship between small
businesses and accountants has been well docu-
mented (Blackburn and Jarvis, 2010; Gooderham
et al., 2004; Mole, 2002; Perry and Coetzer, 2009).
From a socio-psychological perspective, tax com-
pliance behaviour is driven bya range of cognitive
and aective factors. First, small business owners’
attitudes towards tax tend to be less favourable as
they frequently frame taxes as a loss of something
that once belonged to them, e.g. VAT in the
UK that was predominantly perceived as money
owned rather than money collected (Adams and
Webley, 2001; Webley, 2004). Approaches to mea-
suring tax-related attitudes vary widely and Onu
(2016) argues that caution is required when inter-
preting the findings on the relationship between
attitudes and tax compliance behaviour (Onu,
2016). Overall, findings are mixed and attitudes
alone are therefore considered to be an insucient
predictor for tax compliance behaviour (Kirchler,
2007). Second, while findings on the relationship
between general knowledge and level of educa-
tion and tax compliance are mixed, tax-specific
knowledge results in an increase of compliance,
because this knowledge helps small business own-
ers understand its importance while at the same
time acting as a deterrent (Kamleitner, Korunka
and Kirchler, 2012). However, small businesses
owners frequently lack tax-specific knowledge
(McKerchar, 1995). Third, fairness perceptions of
the tax system are a key driver of tax compliance
(Wenzel, 2002) and research has suggested that
small business owners have a heightened sense of
© 2017 British Academy of Management.
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