Performance and Value Added Tax Compliance: Evidence From Small and Medium-sized Enterprises in Edo State
Chapter One
Objectives of the Study
The main objective of this study is to examine the relationship between performance and VAT compliance among SMEs in Edo State. Specifically, the study seeks to:
- Evaluate the level of VAT compliance among SMEs in Edo State.
- Assess the impact of VAT compliance on the financial performance of SMEs.
- Identify the factors influencing VAT compliance among SMEs.
- Examine the challenges faced by SMEs in complying with VAT regulations.
CHAPTER TWO
LITERATURE REVIEW
 Conceptual Framework
Introduction to the Concept of Tax Compliance
Tax compliance refers to the fulfilment of tax obligations by taxpayers, which includes accurate reporting of income, timely payment of taxes, and adherence to the tax laws established by a government (Akinsulire, 2020). In a general sense, it means the extent to which taxpayers comply with the tax laws and regulations imposed by the tax authorities. Tax compliance is critical for the sustainable functioning of any economy as it ensures that the government has sufficient funds to finance public goods and services, infrastructure, and other necessary governmental functions (Blumenthal & Slemrod, 2023).
According to Ayorinde, Samuel, and Akinola (2024), tax compliance can be broadly defined as the willingness of taxpayers to comply with the tax rules and regulations, which involves both the submission of accurate information and the timely payment of taxes. In the context of small and medium-sized enterprises (SMEs), tax compliance is particularly essential, as these businesses contribute significantly to the economy and are often the subject of government regulation. The level of compliance is often influenced by various factors, including the tax rates, complexity of the tax system, and the level of understanding or awareness of tax rules among the taxpayers (Blazic, 2022).
One key critique of tax compliance is the challenge of accurately measuring it. Compliance can be seen as a spectrum, where taxpayers may comply partially, fully, or evade taxes altogether. This creates difficulties in defining and assessing the true extent of compliance (Evans, 2019). Additionally, the factors influencing tax compliance can vary widely, from taxpayer attitudes and behaviours to government enforcement practices. The inherent complexity of the tax system can discourage some businesses, particularly SMEs, from fully engaging in the process due to confusion over which taxes apply to them, how to file, or the penalties for non-compliance (Blazic, 2022). Furthermore, the financial capacity of SMEs plays a role in their ability to comply with tax obligations. Some may face financial strains that hinder their ability to pay taxes, especially in a challenging economic environment (Kirsten, 2019).
In the context of Nigeria, SMEs play an essential role in the economy, and tax compliance is crucial for their continued growth and the nation’s development. However, studies have shown that many SMEs in Nigeria struggle with complying with tax regulations due to factors such as lack of awareness, inadequate tax education, and inefficient enforcement mechanisms (Cobbold, Fosu, & Ayensu, 2023). This issue is compounded by challenges such as corruption, the complexity of the tax system, and a lack of trust in tax authorities (Hijattulah & Pope, 2024). Tax compliance among SMEs in Nigeria is therefore not just about adhering to rules but also involves overcoming structural and systemic barriers that prevent proper compliance.
CHAPTER THREE
METHODOLOGY
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Research Design
A research design serves as a blueprint for collecting, measuring, and analyzing data, and it is crucial in determining the approach and structure of the study (Saunders, Lewis, & Thornhill, 2019). For this research, a cross-sectional and quantitative survey research design was employed to explore the factors influencing VAT compliance among SMEs in Nigeria. A quantitative approach was selected because it allows for a structured and systematic collection of numerical data that can be analyzed statistically. This design was considered appropriate as the study aims to identify relationships between variables, such as socio-economic factors, business characteristics, and VAT compliance behavior, through measurable indicators.
The quantitative survey design is often favored when the research requires generalization to a larger population, especially when dealing with a large sample size, as in this study (Frankfort-Nachmias, Nachmias, & DeWaard, 2021). By using a survey method, data can be collected from multiple SMEs across various regions of Nigeria, ensuring that a diverse range of responses is captured. The survey design also facilitates the use of standardized questionnaires, ensuring consistency in data collection and enabling the comparison of responses across different respondents (Bell, Bryman, & Harley, 2019). This method is efficient for gathering data on the attitudes, perceptions, and behaviors of a large number of respondents within a short time frame.
Study Settings
The study was conducted in Nigeria, focusing specifically on small and medium-sized enterprises (SMEs) operating in various regions of the country. The geographical settings for this study included Lagos, Kano, Abuja, and Rivers States, which represent a diverse cross-section of Nigeria’s economy. Lagos State, as the economic hub of Nigeria, houses a significant number of SMEs, making it a vital area for studying business behavior and VAT compliance. Kano and Abuja represent major regional economies, while Rivers State reflects a different industrial base, primarily linked to oil and gas.
These diverse settings were chosen to capture the various economic environments that may influence VAT compliance differently. The SMEs in these regions vary in terms of business sectors, size, and local economic conditions, which can provide insights into how VAT compliance is influenced by regional factors. This multi-location approach ensures that the findings of the study are comprehensive and representative of the broader SME population in Nigeria.
Population of the Study
The population for this study consisted of 20,000 SMEs across Nigeria. This large population was chosen to ensure a robust and representative sample that reflects the diversity of SMEs in the country. The target population included SMEs from different sectors such as retail, manufacturing, services, and agriculture, operating in urban and semi-urban areas. The selection of SMEs was based on their size, with the definition of SMEs in Nigeria following the standard criteria of having between 10 and 200 employees and an annual turnover that falls within the designated thresholds for small and medium businesses.
The population size of 20,000 was justified based on data from the Nigerian National Bureau of Statistics (2021) and the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN). The chosen target population size allowed for a comprehensive exploration of VAT compliance across various business types and regions. By targeting a large population, the study aimed to increase the reliability of the results and ensure that the findings could be generalized to the broader SME sector in Nigeria (Charmaz, 2016).
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND DISCUSSION
Data Presentation
Demographic Information of  Respondents
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary of Findings
This study explored the impact of Value Added Tax (VAT) compliance on the financial performance of Small and Medium Enterprises (SMEs) in Edo State, Nigeria. It also examined the factors influencing VAT compliance and the challenges SMEs face in adhering to VAT regulations. The research adopted a quantitative approach, collecting primary data through structured questionnaires administered to 392 respondents operating SMEs across the state. The analysis incorporated descriptive statistics and inferential tests including one-sample t-tests to evaluate the stated hypotheses. The findings of the study revealed several critical insights concerning VAT compliance among SMEs and its implications for financial performance and policy formulation.
One of the key findings was the existence of a significant relationship between VAT compliance and the financial performance of SMEs. SMEs that demonstrated a high level of compliance with VAT regulations tended to perform better financially compared to their non-compliant counterparts. This finding highlighted the potential positive influence of tax compliance on business sustainability and profitability. Enterprises that adhered to VAT requirements were more likely to maintain accurate records, access government support, and avoid penalties, which ultimately contributed to improved financial outcomes. VAT compliance also appeared to promote financial discipline and operational transparency, which are essential for building investor confidence and ensuring long-term growth.
The study also found that tax knowledge plays a significant role in influencing VAT compliance among SMEs. Respondents who reported having a good understanding of VAT rules, procedures, and obligations were more likely to comply with the regulations. This suggested that awareness and education are powerful tools in improving tax compliance. Many SME operators who lacked formal training or tax education expressed uncertainty about VAT procedures, resulting in partial or non-compliance. The implication is that providing SMEs with targeted tax education programs and accessible information about VAT processes can significantly improve compliance rates. Knowledge gaps remain a major barrier, and closing this gap could serve as a low-cost, high-impact strategy for improving tax administration in the SME sector.
Another important finding was the influence of record-keeping practices on VAT compliance. SMEs that maintained proper and up-to-date accounting records were more likely to fulfill their VAT obligations. Effective record-keeping facilitated accurate tax calculation, filing, and timely remittance. In contrast, poor documentation and financial disorganization hindered the ability of businesses to comply. Despite this, it was noted that while record-keeping had a positive impact, its statistical significance was borderline, suggesting that while it is important, it may be dependent on other supporting factors such as tax knowledge, access to professional accounting services, and government support systems. This finding emphasized the need to support SMEs in building basic accounting and documentation skills as a foundational step toward enhancing compliance.
The perceived complexity of VAT regulations was identified as a significant barrier to compliance. Many respondents stated that the tax laws were difficult to understand, and the administrative procedures were cumbersome. Complex filing processes, multiple forms, and unclear guidelines discouraged SME operators from full compliance. In many cases, small business owners lacked the resources to hire professional tax consultants, leading to mistakes or non-submission of VAT returns. The study observed that regulatory complexity not only discouraged compliance but also created an environment in which SMEs were more likely to avoid engagement with tax authorities out of fear of making errors or being penalized. Therefore, simplifying VAT regulations and streamlining administrative procedures could lead to substantial improvements in compliance levels.
Another crucial finding was that a lack of government support significantly affected VAT compliance. Many SMEs felt that the government had not provided adequate incentives or supportive structures to ease the tax compliance burden. Respondents cited a lack of subsidies, training, tax advisory services, and startup support as major setbacks. The absence of these support mechanisms contributed to a general apathy toward compliance. Furthermore, there was a perception that VAT payments did not translate into visible public services or business benefits, further reducing the motivation to comply. SMEs that felt disconnected from government support structures were more likely to underreport or evade tax obligations. This finding suggests that improving public service delivery and introducing tax-related incentives could motivate SMEs to be more tax compliant.
The financial constraints faced by SMEs were also identified as a prominent challenge to VAT compliance. Many businesses reported that their financial conditions made it difficult to fulfill tax obligations, especially during periods of low revenue. High operational costs, cash flow challenges, and poor access to finance were common complaints among respondents. In such conditions, tax payments were often deprioritized in favor of meeting immediate business needs like wages and inventory procurement. This finding highlights the importance of designing VAT systems that are flexible and considerate of the financial realities of small businesses. Deferred payment plans, threshold exemptions, and reduced VAT rates for micro-enterprises could be considered as potential solutions to this problem.
In addition, the study found that the administrative burden of complying with VAT regulations was another major barrier for SMEs. Preparing returns, maintaining records, and meeting deadlines were viewed as time-consuming and resource-intensive, especially for businesses with limited staff or capacity. This administrative workload often discouraged full compliance and led to delayed or inaccurate VAT submissions. Many SME operators expressed a preference for simplified tax regimes that reduced paperwork and provided easier ways to file and remit taxes. Digital solutions, automated reporting systems, and mobile-friendly platforms were suggested as means to reduce this burden and encourage higher compliance rates.
Moreover, attitudes toward taxation were also found to play a role in compliance behavior. Some respondents expressed a general unwillingness to pay taxes due to a lack of trust in government or negative past experiences with tax officials. There was a belief among some SME operators that the tax system was unfairly applied or selectively enforced. These negative perceptions created resistance to compliance, even when the business had the capacity to pay. This underscores the importance of building trust between the government and the SME community through transparency, fairness, and inclusive tax policy dialogues.
Overall, the findings of the study painted a comprehensive picture of the current state of VAT compliance among SMEs in Edo State. Compliance was found to be influenced by a combination of internal business factors such as financial condition, knowledge, and record-keeping, as well as external systemic factors including regulatory complexity, administrative burden, and government support. While many SMEs recognized the importance of complying with VAT regulations, a significant number struggled to do so effectively due to these constraints.
Conclusion
Based on the hypotheses tested, the study concludes that VAT compliance significantly influences the financial performance of SMEs in Edo State. The findings reveal that SMEs that adhere to VAT regulations experience better financial outcomes, underscoring the role of tax compliance in promoting business sustainability and profitability. Furthermore, tax knowledge emerged as a crucial determinant of compliance, indicating that improving awareness and understanding of VAT processes can enhance compliance levels among SMEs. Record-keeping practices were also found to positively impact VAT compliance, although at the margin of statistical significance, suggesting that organized financial documentation supports accurate tax reporting.
Additionally, the study confirmed that the perceived complexity of VAT regulations discourages compliance, highlighting the need for simplified tax policies and user-friendly procedures. The overall implication is that both internal business practices and external policy frameworks jointly affect the VAT compliance behavior of SMEs. To improve compliance rates and, in turn, enhance SME financial performance, tax authorities must address knowledge gaps, simplify regulatory procedures, and offer targeted support to SMEs. This holistic approach will not only foster voluntary compliance but also contribute to a more inclusive and robust tax system that supports the growth of small and medium-scale enterprises in Nigeria.
Recommendations
Based on the findings, the following recommendations were proposed:
- Increase Awareness and Training on VAT Compliance: To improve VAT compliance among SMEs in Edo State, it is essential to invest in awareness programs and training sessions on VAT regulations. The study highlights that tax knowledge is a critical factor influencing compliance. Therefore, tax authorities and industry associations should provide continuous education and capacity-building workshops to enhance understanding of VAT regulations and their importance to business growth and financial sustainability.
- Simplify VAT Regulations: The complexity of VAT regulations was identified as a significant challenge for SMEs. To address this, the government should consider simplifying VAT procedures, making them more accessible and manageable for small business owners. This could include creating straightforward tax guides, providing clear instructions on VAT registration, and streamlining the filing process to ensure compliance is not burdensome for SMEs.
- Strengthen Government Support and Incentives for Compliant SMEs: The study found that government support and incentives play a role in encouraging VAT compliance. The government should enhance support programs such as tax reliefs, subsidies, and low-interest loans for SMEs that demonstrate consistent VAT compliance. By offering tangible incentives, SMEs will be motivated to comply, improving both their financial performance and their contribution to the national tax base.
- Promote Proper Record-Keeping Practices: Record-keeping was shown to positively impact VAT compliance. SMEs should be encouraged to adopt proper accounting and financial record-keeping systems. Government and private sector partners could provide incentives for businesses that implement robust financial tracking systems and offer advisory services to ensure accurate documentation, which will ultimately help SMEs meet tax requirements and avoid penalties.
- Enhance Enforcement and Monitoring of VAT Compliance: Although tax knowledge and understanding were key compliance factors, the study also identified the importance of enforcement. Strengthening the monitoring and enforcement mechanisms of VAT regulations can act as a deterrent to non-compliance. Regular audits, transparent penalties, and consistent follow-ups on businesses that fail to meet VAT obligations would ensure better adherence to tax laws, encouraging more SMEs to comply with VAT requirements.
Limitations of the Study
The study, while providing valuable insights into VAT compliance among SMEs in Edo State, has certain limitations that must be acknowledged. One key limitation is the focus on a single geographical region, which may not fully represent the broader experiences of SMEs across other states in Nigeria. Additionally, the study relied on self-reported data from SME owners and managers, which may introduce biases such as social desirability bias or inaccuracies in reporting tax compliance behaviours. The research also did not account for the impact of external economic factors, such as inflation or changes in government policy, which may influence VAT compliance. Furthermore, the study was cross-sectional, limiting its ability to observe changes over time or establish causal relationships between the factors influencing VAT compliance and business outcomes. Lastly, the sample size, while adequate for the analysis, might not have captured the full diversity of SMEs in Edo State, particularly in terms of sector-specific challenges or differing business sizes. These limitations should be considered when interpreting the findings and recommendations.
Suggestions for Further Studies
Future studies on VAT compliance among SMEs in Nigeria could expand on the findings of this research by incorporating a larger, more diverse sample across multiple states to enhance the generalizability of the results. Researchers could also explore the impact of specific industry sectors on VAT compliance, as different industries may face unique challenges or have varying levels of understanding and compliance with tax regulations. Longitudinal studies could be beneficial in observing how VAT compliance and its associated factors evolve, especially in response to changing tax policies or economic conditions. Further research could also delve into the role of government interventions, such as tax incentives or support programs, and their effectiveness in improving compliance rates among SMEs. Additionally, exploring the psychological and behavioural factors, such as tax morale and risk aversion, could provide deeper insights into the motivations behind VAT compliance decisions. Finally, future studies could employ mixed methods to capture both quantitative data and qualitative insights from SME owners, tax authorities, and other stakeholders to obtain a more comprehensive understanding of the factors influencing VAT compliance.
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