Dissertation by Ishfaque Ahmad

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Chapter 1 – Introduction

Chapter 1 – Introduction
“At a time when the Government is tackling the deficit, against a backdrop of global financial uncertainty, it is vital that we focus relentlessly on cracking down on those that break the law and making sure that everyone pays the tax they owe” (HM
Revenue & Customs, 2012, p. 4)
Every year the UK Government spends billions of pounds to provide a better life for its citizens. Most of the money the Government is spending comes from tax revenue. Tax revenue allows the Government to budget expenditure such as education, health and welfare, housing, protection, re-paying national debts and improving the infrastructure. Without tax revenue, the government would not be able to fund the projects and services that people require.
Following the recent recession and the global financial crisis it is important to increase tax revenue for economic growth and keeping the economy moving. The majority of the UK’s individuals and businesses pay their share of tax honestly. However, a minority deliberately seek to evade or avoid paying what they owe while benefiting from the public services (HM Revenue & Customs, 2013). As a result the Government does not receive enough tax as budgeted but spends more than what is collected. This is called budget deficit. It leads to either cuts in the budget of projects or borrowing money from other nations to fill up the deficit. Borrowing is an expensive option and currently the UK government is trying to reduce its national debts and to fill up the deficit with cuts in projects. For example, the UK Chancellor George Osborne recently announced further £25bn spending cuts and much of it from the welfare budget
(Osborne, 2014). The cuts were mainly to reduce the deficit. The UK Government is also trying to reduce the deficit by cracking down on those who breaks the law. As a consequence of evading tax people indirectly reduce their own social wellbeing. The
Government cannot fulfil its obligations due to the lack of tax revenue. Less money is injected into the economy which strongly affects the country's long-term growth.
Evading tax has negative impact on the economy and on the future generations

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Chapter 1 – Introduction

meaning it is important to understand the measures that would stop tax evasion and hence reduce the tax gap.

1.1 - Tax GAP:
“The tax gap is the difference between what is collected and the budgeted figure”
(HM Revenue & Customs, 2013, p. 4). The tax gap in the UK in 2011/12 was £35bn, which was 7% of the total tax liability (HM Revenue & Customs, 2013, p. 4). Figure 1.1 shows that, this was the lowest in the last 7 years and has been steadily reduced from
8.3% in 2005-06 to 7.0% in 2011-12.
Figure 1.1 Tax gap and percentage of liabilities: 2005-06 to 2011-12 (HM Revenue &
Customs, 2013, p. 6)

The main reasons for tax gap are tax avoidance and tax evasion. Tax gap also occur due to non-payments, interpretation of tax of complex transactions, errors and organised criminal attacks. Figure 1.2 shows the estimated tax gap by behaviour in
2010/11. Tax evasion was £14bn, accounting for 46% of the total estimated tax gap. It includes those who operate in the hidden economy and those who were undertaking organised criminal attacks on the tax system. Tax avoidance was 14% of the tax gap for the same time period.

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Chapter 1 – Introduction

Figure 1.2 Tax gap by behaviour, 2010-11 (HM Revenue & Customs, Closing in on tax evasion - HMRC approach, 2012, p. 4)

1.2 - Tax avoidance and tax evasion
Less than a century ago there was no distinction made between avoidance and evasion. They both were described as ‘’tax non-compliance’’ meaning any action taken against a country’s tax system. They have been defined as two distinct terms recently.
Tax evasion: Tax evasion is defined by HMRC as an “illegal activity, where registered individuals or businesses deliberately omit, conceal or misrepresent information in order to reduce their tax liabilities” (HM Revenue & Customs, 2013).
For instance, the Former BBC Radio 1 DJ Chris Moyles tried to avoid up to £1m tax through an avoidance scheme called Working Wheels (Neate, 2014). He claimed to be a used car dealer. The aim was to create a manufactured dividend on a loan and offset the tax against the trading income. It ruled out there was no trade and the Working
Wheels was an attempt to evade tax.
Tax avoidance: According to HMRC, “Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended” (HM Revenue &
Customs, 2013).
For example in 2012, comedian Jimmy Carr used tax avoidance schemes, which enabled him to pay as little as 1% tax on his earning (Malik, 2012). Other recent
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Chapter 1 – Introduction

examples are Amazon, Starbucks and Google. Starbucks had a sales of £400m but paid no corporation tax, Amazon had a sales of £3.35bn in UK but their tax expenses were only £1.8m, and Google UK unit paid only £6m tax when their turnover was £395m
(Barford & Holt, 2013). Although these were legal methods, they were still held as being immoral because those companies used the public services without paying for it.
In the UK, the Government allows people to organise their tax affairs legitimately to minimise tax liability. These may include tax relief in capital investment, savings in an
ISA or contribution towards a pension schemes. These are legitimate forms but they are not the same as tax avoidance. Tax avoidance often involves contrived, artificial transactions that serve little or no commercial purpose other than to produce a tax advantage. Denis Healey the former UK Chancellor of the Exchequer quotes, “The difference between tax avoidance and tax evasion is the thickness of a prison wall”
(Healey, 2000). However, sometimes it is harder to differentiate between tax avoidance and tax evasion because the intention of the taxpayer is not clear or there is a lack of enforcement mechanism in place to address these issues appropriately.
Sometimes it is called tax avoision which is the grey area between tax avoidance and evasion. Research showed there are only two major studies that have investigated the ethics of tax evasion so far. They are the doctorial thesis of Martin Crowe (1944) titled “The
Moral Obligation of Paying Just Taxes” and the doctorial dissertation of Torgler (2003).
Thus, there is a need for further research in this area. The subject of this dissertation is more limited to tax evasion and particularity focusing on the ethics of tax evasion, risk associated with tax evasion and the effectiveness of the actions taken by the UK government to minimise tax evasion.

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Chapter 1 – Introduction

1.3 - Aims and objectives
The aims and objectives of this dissertation are:
1. To research and gain the fundamental knowledge necessary to understand why people evade tax
2. To investigate how ethics, risks and the actions of the tax authority effect the decisions of taxpayers to evade or avoid tax
3. To establish and analyse the influence of gender, culture and knowledge of tax on tax ethics and the attitude towards risk.
The aims will help to identify possible ways to prevent tax evasion. Therefore, all these aims lead to answer a single dissertation question...
What prevents people from evading tax- Ethics, risks or the effectiveness of the tax authority? 1.4 - Proposed Research Method
A questionnaire will be conducted in person and using online surveys in order to successfully achieve the mentioned objectives earlier. The questionnaire will have three parts. Part 1 consisting of eight questions on the ethics of tax evasion. Part 2 and
3 will be looking at the influence of risk and the actions of HMRC on the decisions of individuals. For all three parts, participants will be presented with a seven-point scale to record their responses to indicate whether they agree or disagree with the statements. Then a two-sample t-test will be performed to examine the mean of two populations. A t-test is a statistical hypothesis test, in which the test statistic follows a Student's t distribution to see if the null hypothesis is supported (Fisher, 1971). A ttest is useful to determine whether the average difference between two groups is significant or it is due to a random chance. Robert W. McGee, Simon S. M. Ho and
Annie Y. S. Li (2000) used this method in their research “A Comparative Study on
Perceived Ethics of Tax Evasion: Hong Kong vs. the United States” to demonstrate the response of two groups. They used questionnaires to collect data of Hong Kong and US students. Therefore, using questionnaires is suitable because their approach method is same as the research methodology of this dissertation.
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Chapter 1 – Introduction

1.5 - Chapter Breakdown
Chapter 2 provides a summary of the literature related to reasons for tax evasion, tax ethics and risks associated with tax evasion. It also describes the prospective of male and females towards ethics and financial risk and explains how this stereotypical belief is relevant to this study.
Chapter 3 includes the actions of the UK Government and their effectiveness over the past few years. Chapter 4 explains the research methodology used and chapter 5 is the summary of the analysis and findings. It also discusses if the findings support the existing literature.
Chapter 6 summarises the overall findings of this dissertation, compares the findings with the aims and objectives and concludes which are the most effective factors to stop people from evading tax. In addition, it evaluates the limitations of this dissertation and recommends improvements for future research.

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Chapter 2 – Literature Review

Chapter 2 – Literature Review
This chapter contains a summary of the reasons why people evade tax and provides basic information on tax non-compliance. It describes the decision process of taxpayers in terms of tax evasion which is important to structure a tax system that will discourage tax evasion. The most comprehensive twentieth century work done on the ethics of tax evasion by Martin Crowe is described in section 2.2. Section 2.3 includes the risk involved in tax evasion and how this differs in genders.

2.1 – Why do people evade tax
People evade tax for several reasons and identifying the reasons is important to prevent it. One of the reasons is high compliance costs. Compliance costs are the costs that taxpayers have to bear in conforming to the government requirements such as regulation or legislation and gathering necessary information such as filling out forms, providing basic information and so on. (GIZ Sector Programme Public Finance, 2010)
PwC‘s “Paying tax 2013 – The global picture” shows a massive difference in time to prepare and pay taxes between countries. The range is 12 hours for the United Arab
Emirates to 2600 hours for Brazil. The distributions of hours are more concentrated between 101-350 ranges. 132 out of 185 countries are in this range comparing with
105 out of 174 countries in 2004 (PWC, 2013, p. 32).
Figure 2.1: regional comparison of the time to comply (PWC, 2013, p. 32).

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Chapter 2 – Literature Review

Fig 2.1 shows the regions close to the world average hours of preparing tax are Central
Asia & Eastern Europe. First five regions are below the world’s average. The Middle
East has the lowest with 158 hours, which is 40% below the world’s average. South
America has the highest average at 619 that is almost 2.5 times the world’s average.
Administrative costs are a burden to businesses and individuals, and may therefore be a cause of tax evasion. All the hours spent on bureaucracy increase the expenses. It can be assumed that this burden leads businesses to worry more about the administration cost rather than the tax amount. Under this circumstances the chance of taxpayers not complying with all the tax laws are high. Hence, many governments around the globe are trying to reduce that chance by reducing the tax rate and making tax payments easier to ease the burden for business. Over the last eight years, the total tax rate has fallen by 8% and the time to comply has fallen by 54 hours on average (PWC, 2013, p. 3).
The willingness to comply with tax laws may differ depending on the moral level of individuals. It is not easy to establish the moral level, specifically in countries where the deep-rooted culture is absent. Besides, it is hard to establish morals when people do not have the habit of paying taxes.
Importantly, tax evasion is high if a country’s government is corrupt and does not do much for its people. Failing to provide basic public goods and services would affect the citizens’ willingness of paying tax (Brautigam, Odd-Helge, and Mick, 2008; EverestPhillips, 2008; Lieberman, 2002; Pashev, 2005). There are also cases where government officials work either for themselves or for some special interest instead of working for the public, which encourages tax evasion as well (Gwartney and Wagner,
1988; Rowley, Tollison, & Tullock, 1988; Tullock, 1970, 1983, 1989; Van den Broeck,
1988).
Moreover, many countries have a good tax system in place but still tax evasion is high due to insufficiencies in the tax collection department. Problems could arise due to the poor functioning tax administration or in developing countries organisation’s good relationships with the ministry of finance. Often administration and tax collection by ministries of finance are inefficient and suffers from corruption. (Brautiham, Odd9

Chapter 2 – Literature Review

Helge, & Mick, 2008). This also encourages evasion, as clearly there is no benefit in paying taxes to the corrupt government. Besides, unclear responsibilities in tax administration may cause the inefficiency and tax losses.
A study of tax evasion in Armenia found two main reasons for evasion. “One is the lack of mechanism in place to collect taxes and second one is the widespread opinion that the government doesn’t deserve a proportion of workers income” (McGee,
1999b).
Other reasons for tax evasion include;


Low quality of service in the return of taxes



Tax system and perception of fairness



Low transparency and accountability of public institutions



Lack of rule of law and weak fiscal jurisdiction (GIZ Sector Programme Public
Finance, 2010).

2.2 – The Ethics of tax evasion
Ethics is “moral principles that govern a person's behaviour or the conducting of an activity” (Oxford Universities Press, 2011). When it comes to paying taxes it is generally expected, ethics will play as a guideline for taxpayers on how to act rightly and justly.
The vast majority of the literature in tax evasion has been conducted from an economic or public finance perspective. The discussion has highlighted the technical aspects of tax evasion and the effects of tax evasion on the economy. In many cases, the focus was on how to minimise tax evasion. A small body of literature is addressing tax evasion from the philosophical and ethical point of view. Only two major studies look at the ethics of tax evasion which are discussed below The earliest and the most comprehensive twentieth century work done on the ethics by Crowe (1944) in his doctorial thesis titled “The Moral Obligation of Paying Just
Taxes”. He examined the last 500 years of theological and philosophical literature.
Most of these literatures suggested evading tax is always unethical and sometimes

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Chapter 2 – Literature Review

ethically appropriate. McGee (1994) discussed and summarised the work done by
Crowe. His study includes the opinions of more than 200 scholars who supported all three-view points. Torgler (2003) did a more recent work on this topic as his doctorial dissertation. He looked at tax evasion from a public finance perspective and touched on the psychological and philosophical aspects of the issue.

2.2.1 - The three views:
Over the centuries, three views have emerged regarding the ethics of tax evasion.
View one: Tax evasion is never ethical
There are three underlying rationales for this view. According to rationale one, individuals owe a duty to the state and pay whatever taxes the state demands. There is no such thing as too high or too low tax as people choose the government through democracy. The government knows how to run the country as they are specialists in that area and devoted their whole working life for this. They are more knowledgeable in comparison with the ordinary citizens because the ordinary citizens have neither the time nor the inclination to devote to acquiring the expertise and apply their knowledge to the running of the government. (McGee R. W., Three Views on the
Ethics of Tax Evasion, 2003)
The second rationale is that individuals have an ethical duty to pay tax for the other members who live in the community (Crowe, 1944; Cohn, 1998; Tamari, 1998).
Individuals should not be taking advantage of the services that the state provides without paying for them. If an individual evades tax then it means the rest of the taxpayers are paying more than their fair share creating an unbalance.
The third rationale is that individuals owe a duty to the God to pay taxes, or stated differently, the God has commanded us to pay our taxes (Cohn, 1998; DeMoville,
1998; Smith & Kimball, 1998; Tamari, 1998). This view holds no water among atheists, of course, but the view is strongly held in some religious circles.

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Chapter 2 – Literature Review

View two: Tax evasion is never unethical
View Two is labelled as the anarchist view, which does not address the ethics of tax evasion directly but rather discusses the relationship of the individuals to the state. It begins with the premise that all governments are illegitimate. All governments are thieves (the taking of property without the consent of the owner), they confiscate assets, percentage of paychecks and so on. According to this view, there are no such things as social contract and no agreement to pay taxes. This means all taxation essentially involves the taking of property by force or the threat of force without the owner’s permission. Therefore, it meets the definition of theft and hence it is not unethical to evade tax, as the governments are corrupt and unworthy of receiving any tax payments (McGee R. W., Three Views on the Ethics of Tax Evasion, 2003).
View three: Tax evasion is sometimes ethical
This view holds that tax evasion is ethical depending on the circumstances. Crowe
(1994) spends 177 pages discussing when tax evasion is ethical and when it is not.
There is no ethical obligation to pay tax to the government if they do not use the collected revenues for the common good of the people (Angelus and Clavisio, 1494).
Taxpayers never enter into a contract with the government to pay tax. According to
Crolly (1877), “there is no duty to pay taxes unless evasion would result in violence”.
However, if a government is honest and works for its people then it would be unfair to evade tax.

2.2.2 - Ethics and Gender
One of the most important trends in recent years is the increased participation of women in the workforce, especially of women holding more managerial positions in business than ever before. It has attracted the interest of researcher to see the impact of having women in business practice. One of the popular areas of concern is the effect of gender differences in ethical decision.
A study carried out by the researchers at the University of Pennsylvania's Wharton
School shows that women are less willing to sacrifice ethical values for money and social status, and women associate business with morality more strongly (Ko, 2013). A

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Chapter 2 – Literature Review

number of studies compared the ethical approach of men and women. Based on many financial crime researches and studies of Akaah, 1989; Boyd, 1981; Hoffman, 1998 it is assumed that men are more unethical in comparison with women. Evidence of this the two biggest recent scandals, Enron and WorldCom. For both cases, the CEO and
CFO were men. Some studies found that there is not a significant difference between the ethics of men and women (Browning & Zabriskie, 1983; Harris, 1990; Nyaw & Ng,
1994). Other found that men are more ethical than women (Barnett & Karson, 1987;
Weeks, Carlos, Joseph & Justin, 1999).
The gender difference exists in many aspects of the society. The same applies for ethics, as each gender perceives them in different ways. This dissertation is investigating how the ethics of men and women influences the tax decision of taxpayers to examine which group is more ethical.

2.3 – Risks in evading tax
2.3.1 - Risk
The decision of tax declaration is a decision under uncertainty. Becker (1968) used economic analysis to develop optimal private and public policies to combat illegal behaviour. His model deals with the evasion of income tax. According to his research, a person would commit crime (evading tax) to maximise their utility. Number of crime and public’s decision varies depending on the conviction, the size, and the level of the punishment. It is discouraging to evade tax if the cost of crime exceeds the benefit and vice versa.
Allingham and Sandmo (1972) also looked at income tax evasion and examined the taxpayers’ decision in the presence of risk. They established that the risk of getting caught and punishment induces tax compliance. Their research was adopted based on
Becker’s (1968) model of economics crime (Allingham & Sandmo, 1972). Andreoni,
Erard, and Feinstein (1998) provided a comprehensive review of the tax evasion compliance literature and agreed that, in Allingham and Sandmo (1972) model the findings such as the effects of penalties and audit probabilities are clear (Andreoni,
Erard, & Feinstei, 1998).

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Chapter 2 – Literature Review

Brown and Reynolds (1973) suggested the probability that a person will conduct unethical behaviour depends on the expected gain or loss of their action, individual’s attitude towards risk, their ethical reasoning level and their perception of the likelihood of being caught. Other research also shows similar findings. The decision of whether or how much tax an individual would evade depends on the possible legal penalties. Optimal tax evasion would depend on the probability of being caught, the size of the penalty and individual’s degree of risk aversion (Slemrod, 2007).
Anderson (2010) also looked at tax evasion behaviour and applied the method of
Meyer and Ormiston (MO) (1983, 1985) in his paper “Tax Evasion Behaviour in the
Presence of Progressive Taxation and Increasing Risk”. His results confirm that high risk and high penalty rate discourage under-reporting income. His implication was that the tax authority could encourage tax compliance by increasing the risk involved and increasing the penalty rate. He also suggested tax evaders prefer certainty in the penalty rate and it would be even more discouraging if the rate of penalty were uncertain (Anderson, 2010).

2.3.2 Risk and Gender
A substantial amount of research indicates that women are typically more risk averse than men. Jianakoplos and Bernasek (1998) investigated the actual existence of increased risk aversion in female financial decision-making. Their survey in the
Consumer Finances found that women tend to hold a less risky portfolio than men do.
Bernasek and Shwiff (2001) examined the investment decision on the allocation of pension assets to stock and found similar results.
On average, while dealing with finance and investment decisions women are less willing to accept financial risk (Barsky, Juster, Kimbal, & Shapiro, 1997). The literature in general psychology, contains many primary and meta-analytic studies of gender difference in decision making, social, cognitive ability and personal traits. According to
Johnson and Powell 1994, “research finding before 1980 were instrumental in establishing a dominant view that substantial gender traits difference exists in the nature and outcome of management decision involving risk”. His study shows women

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Chapter 2 – Literature Review

are more risk averse, less confident and easier to persuade when making decisions under risk, compared with men.
These stereotypical beliefs could exist when people are facing tax evasion decisions because evading tax is an illegal activity and there are risks associated with that. The questionnaire addresses scenarios that could arise as a consequence of evading tax.
The aim is to look at how risks manipulate the decision of taxpayers and to assess the degree to which women display a risk averse behaviour than men.

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Chapter 3 – The Effectiveness of the UK tax authority

Chapter 3 – The Effectiveness of the UK tax authority
HMRC is constantly trying to minimise the opportunities of tax evasion by detecting it early, when it arises and counteracting the situation through rapid investigation and legal challenges. Effectiveness in the actions taken by HMRC means the probability of being penalised or the risk of getting caught is high. This demoralises unethical behaviour. Therefore, taking effective actions to prevent tax evasion and the lack of opportunities could stop people from evading tax.
Globalisation has increased organised crime which is a multinational business. The techniques used by the criminals are more sophisticated nowadays. HMRC is constantly trying to be innovative to detect and tackle these activities. They have invested in nearly 500 additional staff, which prevented a loss of more than 1.75bn since 2010. In 2010, the Government allocated £917m to HMRC to reinvest in generation of an extra compliance revenues of £7bn a year by 2015. As stated in
Chancellor’s Autumn statement 2012, the Government is spending further £77m in activities to improve HMRC’s capability on aimed projects to reduce tax avoidance and evasion. At the G8 summit in June 2013 HMRC announced to take step towards achieving greater international transparency to prevent offshore tax avoidance and evasion (HM
Revenue & Customs, 2012). The Government made new agreements to work closely with the other EU members to establish automatic exchange of information between tax authorities and agreed to work with the OECD to develop a better model to prevent offshore tax evasion (HM Revenue & Customs, 2012). Recently 12 other EU countries joined this initiative to exchange information on accounts held by those jurisdictions with the UK and others. It has recovered billions so far. Additionally, it is projected that the agreement with Isle of Man Liechtenstein Disclosure Facility will bring in £3bn, Guernsey and Jersey will raise £1bn and the agreement with
Switzerland will secure £5 billion in unpaid tax (HMRC, 2013, p. 15). Moreover, HMRC has also set up a new centre of excellence to enhance their expertise in dealing with offshore tax evasion (HM Revenue & Customs, 2012).

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Chapter 3 – The Effectiveness of the UK tax authority

In recent years, the UK Government has been running campaigns on tax evasion and encouraging people to pay what is owed before HMRC track them down. The result has been brilliant so far; they raised £547m from voluntary disclosures, and nearly
£140m from follow-up activity including 20,000 completed investigations (HM
Revenue & Customs, 2012).
HMRC is also taking rapid action against those who are not coming forward to pay their taxes. They allocated more resources to speed up the tax evasion case being brought before the criminal and civil courts. They have already recruited 200 additional criminal investigators to increase the number of people prosecuted for tax evasion from 165 in 2010 to 2011, to 565 in 2012 to 2013, and to 1,165 in 2014 to
2015 (HM Revenue & Customs, 2012). Since 2010, HMRC has prosecuted more than
1560 individual tax crimes with a success rate of 91% in the court (HMRC, 2013).
Likewise, HMRC is expanding the Affluent Unit by hiring an extra 100 intelligence staff to deal with evasion and avoidance by wealthy individuals (HM Revenue & Customs,
2012). These specialists will prevent the evasion of inheritance tax, using offshore trusts, bank accounts and other entities.
Furthermore, the HMRC is investing to improve their ability to use data and advanced technology to identify tax evasion and fraud risks. It has been effective and they brought in £1.4bn of tax revenue by investing £45m in these actions. Improving the
CONNECT analytical computer system will help the department to identify areas of non-compliance risk. “CONNECT has already generated around £2bn in additional tax yield – a return of more than 40 times the initial investment” (HMRC, 2013, p. 13). This has allowed them to take actions quickly to identify and investigate deceptive behaviour. The UK Government has also taken others big steps like GAAR, DOTAS, tracking the tax avoidance schemes, online reporting and the big four Accounting firms are helping government to prevent tax avoidance. All of these schemes are mainly effective to stop or reduce tax avoidance but they do not or only have a minimal effect of the decision of tax evasion. Therefore, these schemes are not relevant to this assignment and have not been mentioned in the questionnaire either.
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Chapter 4 - Methodology

Chapter 4 - Methodology
Secondary data is “Re-analysis of data for the purpose of answering the original research question with better statistical techniques, or answering new questions with old data” (Glass, 1976). It is inexpensive, easily accessible, and immediately available, helps to provide background to clarify and refine problems, provides alternative methods and difficulties previous researches have faced in the past (Ghauri &
Grohaug, 2002). Conversely, secondary data is not always relevant and the sources are not reliable. The data might be out of date or might not be appropriate for specific research. Some of the data are not easily accessible. This leads to problems with the accuracy of the data and the lack of credibility of the source, which could question the quality of the research (Ghauri & Grohaug, 2002).
Due to the limitations of the secondary data and the nature of this research, this dissertation will only use primary data. McGee and Noronha used similar research methods in their research paper “The ethics of tax evasion: a comparative study of
Guangzhou (southern china) and Macau opinions”. Therefore, using primary research methods are suitable for this dissertation. Secondary research was only used to assemble the ideas and in planning for the dissertation.
Primary data is “data that has been collected for the study in which it is used” (Horn,
2009, p. 135). The most important advantage of using primary research is, it is very descriptive, focused on the specific research area and it is up to date (Glass, 1976, p.
3-8). It gives data validity and ensures that the data is reliable because the research was done personally and the source of the data will not be questioned. However, primary research takes time and it is expensive. The data is not readily available and accessible. It takes time defining the problem, developing the method, collecting and analysing the data (Hair, Money, Samouel, & Page, 2007).

4.1 - Research Method
To learn the views of the participants on the ethics, risks and the effectiveness of the
Government, 250 students were asked to complete a questionnaire in person and on

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Chapter 4 - Methodology

online survey. For all questions, participants were presented a seven point scale to record their responses to indicate whether they agree or disagree with the statements
(1 being strongly agree to 7 being strongly disagree).
The advantage of using a questionnaire was that the information was collected rapidly. It was also easy to collect information from a large and diverse group of people. This was an effective way to get different views on the subject. Online questionnaires were faster, less expensive and easier to modify in a timely manner.
Sampling was the initial and important part of structuring the questionnaire because non-sampling errors are a major contribution to poor quality survey outcomes (Assal
& Keon, 1982). One of the most important criticisms of questionnaires is, that the questions asked are often too complex (Chua, 1996). Sampling helped to overcome these criticisms. The initial questionnaires were presented to a group of 10 students, studying at Portsmouth Business School with an intention to refine the questionnaire.
The focus group helped to check whether it was coherent by all the participants. The initial feedback was, “the questionnaire was too long”. Following the feedback of the individuals, a second questionnaire was formed which reflected the initial feedback and was then presented to 10 different students. The next steps were taken carefully to ensure that the final questionnaire was clearly and easily understood by all the respondents. The structure of the questionnaire was designed following the suggestions of Parker
(1992). Short and easy questions were present at the beginning of each part to encourage the participants to answer all the questions. Early questions were relevant to the literature and final questions were about personal issues such as sex, student status and knowledge of taxation.
The questionnaire was divided into three parts. Part 1 consisted of eight questions reflecting the three viewpoints on the ethics of tax evasion. It was based on the arguments on tax evasion that Crowe (1944) used in his dissertation. The original questionnaire had 15 questions but only eight questions were used in this questionnaire to reflect the literature. Part 2 had six questions that considered how risk influences the decisions of individuals. These questions also helped to compare
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Chapter 4 - Methodology

the approach of males and females towards risks. Part 3 focused on participants view on the effectiveness of the actions taken by the UK Government and HMRC over the past few years.
Once the responses were collected, a two-sample t-test was performed to compare the means of the groups. A t-test is a statistical hypothesis test in which the test statistic follows a Student's t distribution to check if the null hypothesis is supported
(Fisher, 1971). It is useful to ensure whether the average difference between two groups is significant or it is due to a random chance. For each section of the comparison, groups were different. For instance, when comparing the ethics based on sex, the groups were males and females, for student status it was home and overseas students. Robert W. McGee, Simon S. M. Ho and Annie Y. S. Li (200) used this method in their report “A Comparative Study on Perceived Ethics of Tax Evasion: Hong Kong Vs the
United States” to demonstrate the response of two groups.
The hypothesis in a two-sample t-test is as follows: For example, when comparing ethics of male and female the hypotheses were –
Null H0: µ1 = µ2 the population mean for male (µ1) and female (µ2) are the same
Alternative (Research) Ha: µ1 ≠ µ2 the population mean of male and female are different. The hypothesis follows similar pattern when comparing students based on student status and tax knowledge.

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Chapter 5 – Findings and analysis

Chapter 5 – Findings and analysis
This chapter will be discussing and analysing the findings. The details of tables, which have been used in this chapter, are shown in the appendices. This chapter includes a summary of the respondents’ profile. Then it reviews the overall findings on the ethics, risks and the effectiveness of the actions taken by the UK Government to minimise tax evasion. The next part breaks down the ethics by comparing ethics based on sex, student status and knowledge of taxation. Finally, it compares the attitude to risk in terms of sex, student status and tax knowledge to verify if these factors have any impact on the decision. Moreover, the analysis of each of the above parts will discuss whether the results support the literature.

6.1- Respondents profile
A total of 250 questionnaires were handed out and 214 usable responses were received. As shown in the appendix A1, 52% of the participants were males and 48% were females. In terms of student status, 56% were overseas students and 44% were home students and the majority of the participants (44%) were second year, 25% were from third year, 27% from first and 4% post-graduate students. Concerning whether the student had studied taxation in the past, the majority of the respondents studies tax (60%), and 40% did not study tax at all.

6.2 - Overall assessment
A2.1 summarises the statements of the Ethics section and shows the mean score for each statement. The mean score for all of the 8 statements is 4.41. On a scale of 1 to
7, 4.41 indicates a relatively weak feeling that tax evasion is unethical. However, some of the statements of A2.1 have higher scores, which indicate that the view on some statements is stronger than others.
A2.2 ranks the statements from the lowest score (agree) to the highest score
(disagree). The mean of the statements is 3.49-5.28. Statements can be divided into three points based on the scores;
A1 - Summary of the demographic makeup of the sample
A2.1- Ethics: Summary of respondents
A2.2 - Ethics: Summary of the respondents agree to disagree

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Chapter 5 – Findings and analysis

1) View 1- Tax evasion is always ethical if the scores are equal to 2 or below
2) View 2- Tax evasion is sometimes ethical if the scores are above 2 but below 6 and
3) View 3- Never ethical if the scores are above six falls into this category.
The means of all the statements support view two that tax evasion is ethical in some circumstances. The first three statements in the table show that low moral is the reason for evading tax. For example, participants believe that it is permissible to evade tax if the government is corrupt, if the tax system is unfair and if the tax revenue is not spent wisely or being wasted. To some extent, people seem to support the findings of
Brautiham, Odd-Helge, and Mick, 2008 that inefficiency in tax collection and corruption is a reason for evading tax. The other two statements support the findings of the Gwartney and Wagner, 1988; Rowley, Tollison, & Tullock, 1988; Tullock, 1970,
1983, 1989; Van den Broeck, 1988 that if the government is unfair, using the tax revenue for their benefit or not using the money properly then it encourages people to evade tax. The strongest arguments that suggest tax evasion is unethical are the religious reasons, following everyone else who is evading tax and discriminating government. A3.1 shows the mean score of the six statements used to assess whether risk stops people from evading tax. The mean score for all of the 6 statements is 3.23 which suggests participants tend to agree that risk does have an effect on their decision to some extent and stops them from evading tax. Some factors of risk seem to have a stronger effect on the decision than others.
A3.2 ranks the arguments from strongest to weakest. The means of the statements are between 2.83-4.24. The factors that have most effect on peoples’ decisions are the likelihood of getting the accounts checked by the tax authority and if evading tax has negative impact on reputation or social life. Others were risk of getting caught and getting a substantial penalty. The results are similar to the findings of Allingham and
Sandmo (1972) that high penalties and audit probabilities have clear effect on taxpayers decisions.

A3.1 - Risk: Summary of the respondents
A3.2 - Risk: Summary of the respondents strongest to weakest

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People slightly agreed that uncertainty in the level of penalty have an effect on their actions. To some degree, it supports Anderson’s (2010) suggestion that certainty in the penalty rate would discourage tax evasion but it is not as strong as other factors.
People disagreed that a small fine would stop them from evading tax where they agreed that high penalty would almost certainly stop them from evading tax. This aligns with Slemrods (2007) research that the size of the penalty does have an effect in tax evasion decisions and the research of Anderson (2010) that increases in risk and penalty rate discourages under-reporting income. It also supports the analysis of
Becker (1968) that the level of tax evasion depends on the level of punishment provided by law.
A4.1 lists the five statements on the Effectiveness of the actions taken by the UK
Government. The mean score for all of the five statements is 2.76 indicating participants tend to agree that the effectiveness of the actions taken by the
Government would help to stop tax evasion. Government spending money on new technology and campaigning against tax evasion is considered the most effective actions that would stop people from evading tax. The other effective actions are hiring specialists to investigate wealthy individuals and working closely with the EU countries. Hiring specialists to speed up tax evaders’ case is considered the least effective action. A4.1 also shows that all the scores are close to or below three suggesting that respondents believe all the statements, are effective and will be helpful to prevent tax evasion.

6.3 - Ethics
The responses of A5.1 shows both males and females believe tax evasion is unethical.
The mean score of all statements is 4.41, with overall mean of 4.22 for males and 4.6 for females. The table shows females have a higher score when compared with males supporting the research of Akaah, 1989; Boyd, 1981; Hoffman, 1998 mentioned previously. The results imply that males are more likely to be conditional in their perceptions on tax evasion against females who have a greater tendency to believe that tax evasion is
A4.1 - Summary of respondents: Effectiveness of the Government actions
A5.1 – Ethics: Independent Samples t-test between Males and Females

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ethically wrong. Closer analysis of the statements show both males and females believe it is ethically wrong to evade tax even if everyone else is doing so (males 5.04, females 5.14 respectively) and religious reasons are not a satisfactory reason to evade tax (males 5.16 and females 5.40 respectively).
In addition, both groups consider that high tax rate does not justify tax evasion but evading tax is justifiable if the tax system is unfair. Interestingly the male participants tend to agree that, if the tax revenue is not spent wisely then it is acceptable to evade tax, where the female participants disagree to this statement. Independent t-test shows the scores of all these three statements are statistically significant. At 1% significant level, if the same test was performed again then, the likelihood of getting the same result for statement 1 and 3 are very strong. Statement 3 is also significant but at the 10% level.
Although the results present a difference in male and females view point of on the ethics but the hypothesis test suggests that the result of statements 4, 5, 6, 7 and 8 is not significant and it happened by chance. For these statements, null hypothesis is true which states that the ethics of both males and females are same. It seems to agree with the suggestion of Browning & Zabriskie, 1983; Harris, 1990; Nyaw & Ng,
1994 that there is not a significant difference between the ethics of men and women.
The response of home and overseas students in A5.2 indicates home students illustrated more ethical behaviour than overseas students did. The mean scores are
4.44 and 4.34 respectively. A detailed analysis shows both groups agreed that corrupted government and unfair tax system justifies tax evasion where religious reasons and a discriminating government are unjustifiable reasons to evade tax. The only difference in opinion is home students believe it is unethical to evade tax even if the tax revenue is being wasted but the overseas students think the opposite.
The result of an independent test shows these two statements are significant. It confirms that home students are more likely to evade tax if the government is corrupt and strongly opposed to the notion that religious reasons can justify tax evasion. Apart from that, there is no difference in the ethics of home and overseas students.
A5.2 Ethics: Independent Samples t-test between home and overseas students

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However, the p-value of statement 3 and 5 are close to 10% significant level, which suggests that these statements may have been significant as well providing the groups were equal.
A5.3 shows that students who studied taxation showed more ethical behaviour in comparison with students did not study taxation. The mean were 4.62 and 4.09 respectively. Students without tax knowledge are more likely to evade tax if the tax rate is high and tax system is unfair comparing with students who studied tax. If the
Government is wasting a large proportion of tax revenue then students without tax knowledge would evade tax but the students with tax knowledge would not. Both groups believe that it is unethical to evade tax if the tax revenue is not benefiting them. The results of the hypothesis test show that the values of these statements are significant at 1% and 5% level.
The result supports the findings of Eriksen and Fallen (1996) that, increase in tax knowledge meant, people consider tax evasion more seriously and the perception of the fairness of the taxation increases. It also agrees with the view of Price (1992), “the level of tax compliance among the taxpayers can be increased by improving their perception on the tax system and their understanding on tax knowledge” (Price,
1992). However, statements 5-8 are not significant.

6.4 - Risk
A6.1 shows the mean score of all statements is 3.22, with overall mean of 3.20 for males and 3.24 for females. This shows that both males and females tend to agree to some extent that risk has an effect on their decision. The overall mean score recommend that males are slightly more risk averse than females. Both groups are likely to be risk averse if tax affair is being checked, if it causes bad reputation or if the likelihood of getting caught is too high.
Penalty effects the decision of both groups but the level of penalty has more effect on males as a higher fine discourages males to evade tax compared with females.
Females tend to be more risk averse where evading causes bad reputation. However,

A5.3 Ethics: Independent Samples t-test between students with tax knowledge and without knowledge
A6.1 Risk: Independent Samples t-test between males and females

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a small fine has less effect on this tax evasion decision and participants are still likely to evade tax (male mean= 4.31 and female mean=4.11).
The independent test shows none of the statements are significant which implies, the outcome happened by a chance. Thus, sexual stereotype may exist in financial decision-making but there is no evidence of it in the decision of tax evasion. Based on the t-test result the null hypothesis is accepted which states that, there is no difference between the approach of males and females towards risk.
A6.2 shows when compared with overseas students, home students are more risk averse when there is a chance of getting the accounts audited, the chances of getting caught is high, evading tax causes bad reputation and if the level of penalty is high.
Although penalty affects both groups decision but the level of penalty has more effect on home student because higher fine discourages home students to conceal tax compared with overseas student.
The result of the independent t-test supports the findings, as five out of the six statements are significant. Some of the significant level is stronger than others.
Statement 5 is significant at 1% level, statement 1 is significant at 5% level and statement 2, 4 and 6 are significant at 10% level. This rejects the null hypothesis and accepts the alternative hypothesis.
The response in A6.3 show that both groups of students believe risk does have an effect on the decision of evading tax. The mean are 3.34 and 3.03 respectively. For almost all the statements students without tax knowledge are more risk averse.
Significant differences have been identified in statements 1, 2 and 6. Students without tax knowledge take chances of getting caught, high fines, accounts being audited and a bad impact on the image more seriously than students who have studied tax.
Although there is a difference between two groups and their attitude towards risk but the hypothesis test only supports two statements. These are students without tax knowledge are more risk averse while evading tax causes negative impact on the

A6.2 Risk: Independent Samples t-test between home and overseas students
A6.3 Risk: Independent Samples t-test between students with tax knowledge and without knowledge

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social life and if there is a high fine associated with tax evasion. The independent ttest implies that the result of statements 1, 3, 4 and 5 occurred by chance. Therefore, null hypothesis is true for these statements and there is no difference between the attitudes towards risk in both groups.

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Chapter 6 - Conclusion
The main aim of this dissertation was to investigate whether ethics, risks and the actions taken by the UK Government to minimise tax evasion effect the decision of the taxpayers to evade or avoid tax. Another aim was to establish and analyse if gender, culture and knowledge of taxation have any influence on the tax ethics and the attitude towards risk. A primary research using questionnaire was carried out to investigate these aims. The responses were then statistically analysed using a two sample independent t-test to examine the differences between groups. The test was needed to verify whether the mean between two groups is significant or it is only due to a random chance. The results were then related back to the literature to form a conclusion as to whether the ethics, risks and the actions of the tax authority prevent people from evading tax.
Chapter 2 summarised the literature, discussing the reasons for evading tax, the views on ethics and the risks associated with evading tax. It also looked at the effect of gender on ethical decision-making and approach of males and females towards financial risks and explained how this stereotypical belief is relevant to this study.
Chapter 3 examined the actions of the UK Government and their effectiveness in the past few years. Chapter 4 described the research method used in this dissertation.
Chapter 5 analysed the findings and discussed whether the findings support the existing literature.
The overall findings concluded that evading tax is generally unethical. However, some considered evading tax as an ethical practice in circumstances where the government was corrupt, the tax system was unfair, or if the collected tax revenue was not spent wisely and towards the benefits of its citizens. To some degree the result supported the findings of Brautiham, Odd-Helge, & Mick, 2008 in chapter 2 section 2.1 that
“inefficiency in tax collection and corruption are reasons why people evade tax” and the findings of the Gwartney and Wagner, 1988; Rowley, Tollison, & Tullock, 1988;
Tullock, 1970, 1983, 1989; Van den Broeck, 1988 that states “if the government is unfair and using the tax revenue for their benefit instead of public interest then
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people would evade tax”. Conversely, participants strongly believed that religious reasons and following everyone else who is evading tax does not justify tax evasion.
Discriminating Government and projects that individuals did not morally support were also highlighted. These above findings are similar to the findings of McGee, Aljaaidi and Musaibah, (2012) in their research paper “The Ethics of Tax Evasion: A Survey of
Administrative Sciences’ Student in Yemen”.
In general, risk in evading tax influenced the decision of individuals to some extent.
Major findings were, the likelihood of getting the accounts checked by the tax authority and having a negative impact on reputation because of evading tax are considered the most effective factors. Same results were found in chapter 2 subsection 2.3.1 that high penalties and audit probabilities have clear effects on taxpayers decisions (Allingham & Sandmo, 1972). A small penalty had less impact on a decision compared with a high penalty. This aligned with the research of Slemrod (2007) that
“the size of the penalty does have an effect in tax evasion decision” and the research of Anderson (2010) that “an increase in risk and penalty rate discourages underreporting income”. It also supported the analysis of Becker (1968) that “the level of tax evasion depends on the level of punishment provided by law”. These were mentioned in chapter 2 sub-section 2.3.1.
Males were more likely to be conditional in their perceptions on tax evasion against females who had greater tendency to believe that tax evasion is ethically wrong. Both groups believed high tax rate did not justify tax evasion but evading tax was justifiable if the tax system was unfair. Interestingly the male participants agreed if the tax revenue was not spent wisely then it was permissible to evade tax, where as the females disagreed. The findings were also acknowledged in Chapter 2.2.2 by Akaah,
1989; Boyd, 1981; Hoffman, 1998 that “men are more unethical than women”. The independent t-test showed these statements are statistically significant. The analysis also showed that males are slightly more risk averse than females. Penalty effected the decision of both groups but the level of penalty had more effect on males as a small penalty encouraged them to consider evading tax and higher penalty discouraged them. Females do not evade tax as they fear bad reputation. The independent test showed none of these statements were significant which means the
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results were obtained by chance and there is no difference between the attitude of males and females towards risk. Therefore, sexual stereotype may exist in financial decision-making but there is no evidence that it is true with regards to the decision of tax evasion.
There was no major difference between the ethics of home and overseas students however home students are more risk averse compared with overseas students. Both groups agreed that corrupt government and unfair tax system justifies tax evasion where religious reasons and a discriminating government were an unethical reason to evade tax. However, the independent test only supported that, home students are more likely to evade tax if the government is corrupt and strongly opposed that religious reason could justify tax evasion. For other statements, there was no difference in the ethics of home and overseas students. However the substantial findings were home students found to be more risk averse when there is a chance of getting the accounts audited, chances of getting caught is high, evading tax causes bad reputation and if the level of penalty is high. The results of the independent t-test supports the findings, as five out of the six statements are statistically significant. This allowed the null hypothesis to be rejected and the alternative hypothesis to be accepted. The most interesting findings on the ethics were the comparison of students on tax knowledge. The comparison showed students without tax knowledge were less ethical but more risk averse. Both groups believed that it was unethical to evade tax if the tax revenue was not benefiting them. It appears that students without tax knowledge were more likely to evade tax if the tax rate was high and tax system was unfair.
Therefore, “increase in tax knowledge improves the tax compliance and the perception of the fairness of the taxation” (Eriksen & Fallen, 1996; Price, 1992).
Additionally, students without tax knowledge were more risk averse in every scenario.
However, the hypothesis test only supported that, students without tax knowledge are more risk averse when evading tax caused a negative impact on the social life and if there was a high penalty related with evading tax. Other statements were not significant. 30

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Finally, the effectiveness of the actions taken by the UK Government in the past few years were considered the most effective factors preventing people from evading tax.
The money spent by the Government on new technology and campaigns against tax evasion was considered to be the most effective action. The others were hiring specialists to investigate wealthy individuals and working closely with the EU countries. Hiring specialists to speed up tax evaders’ case was considered the least effective action. The score of all these actions were close to or below three which suggests that respondents believed all the statements are effective and will be helpful to prevent tax evasion. The successes of these actions were discussed in chapter 3.
It can be concluded that the UK Government can educate people with basic tax knowledge and introduce a high penalty rate, audit frequently, name and shame the tax evaders, along with the current actions to ensure increased tax compliance.
Anderson (2010) suggested this in his research and the results of this dissertation strongly supports his findings.

6.1 - Limitations & Further research
The limitations of this research needs to be considered. The study primarily used opinions of students. Recruiting students in research has been justified by many authors such as Ashton and Kramer (1982) who suggest, the information-processing behaviour of students and real-world decision making does not differ in both business and psychological research. Another example is Abdolmohammadi and Wright (1987), who argue highly structured decision tasks and the performance of a student should not differ significantly from that of real-world decision-makers. However, they do not have the experience of working in a real life commercial environment and their judgement may only be based on textbooks. Therefore, they may not represent the general population and the data cannot be extrapolated to the wider population. This can be overcome by further research with the opinions of professionals who are working and paying tax regularly.
The second limitation of this research was the questionnaire itself. Participants may provide vague answers which might question the validity of the results. Some questions were missed by the participants which can also contribute to the inaccuracy
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of the results. However, questionnaire is an easy and quick method of obtaining data.
According to Weber & Cook, 1972 and Schepanski, Tubbs & Grimlund, 1992 lab based experiments are associated with expectation bias. Under this circumstance it is necessary to ensure that the subjects are unaware of predicted results in order to deliver a valid result (Smith M. , 2011).Questionnaire overcomes the interview bias and lab based experiment problems thus this dissertation used questionnaires.
Finally, many participants did not have any basic tax knowledge which demanded explanation and consumed time. They were also unaware of the activities of HMRC.
This could have been improved by providing a workshop on basic tax knowledge to all participants prior to the research.
This dissertation was mainly focused on the gender stereotype. However, the findings showed some unexpected results, which were not the aims of the dissertation. Tax knowledge clearly influences the attitude towards risk and the cultural difference has an effect on the ethics of tax evasion, shown by this research. Therefore, looking at how culture influences the attitude towards risk, the work of Eriksen and Fallen (1996) and Price (1992) on how tax knowledge effects the ethics would be a promising further research area.

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