Probability of Detection and Value Added Tax Compliance among Small and Medium Enterprises in Westlands Sub County, Nairobi, Kenya: Moderating Effect of Tax Service Quality

Purpose: Value-added tax compliance has remained a challenge, especially when it comes to SMEs operating in Kenya. The high level of informality of this sector provides an incentive for most of the SMEs to evade payment of VAT, a situation that has constrained the amount of tax revenues available to finance fiscal budget. This study aimed to determine the moderating role of tax service quality on the relationship between probability of detection and value added tax compliance among small and medium enterprises in Westlands Sub County, Nairobi, Kenya. Methodology: The study adopted an explanatory design targeting 751 SMEs operating in Westlands Sub- County, Nairobi, Kenya as registered by Nairobi City County. The sample frame was the list of SMEs in Westlands Sub- County that is available in Nairobi City County. The sample size was 261 owners of the said SMEs who were stratified into four categories based on the nature of undertaking of their business and a representative sample from each of these categories was drawn. Gathering of information was by use of a questionnaire. To analyze the collected information, descriptive statistics like means and standard deviations as well as multiple regression analysis was adopted. Results: Regression of coefficients showed that probability of detection had a positive and significant effect on VAT compliance of SMEs (β=0.358, p=0.000). The findings also revealed that tax service quality moderates the relationship between probability of detection and value added tax compliance among small and medium enterprises (β= 0.086, ρ<0.05). Conclusion: The study concluded that probability of detection had a positive and significant effect on VAT compliance of SMEs. In addition, the study concluded that tax service quality moderate the relationship between probability of detection, on value added tax compliance among small and medium enterprises in Westlands Sub County, Nairobi, Kenya. KRA should increase the rate probability of audit detection by coming up with new mechanisms of audit detection thus enhancing VAT compliance of VAT amongst the SMEs. The government should strive to provide SME owners in Westlands Sub County, Nairobi, with services that are of high standards for example at the tax stations as clearly stated in the corporate plan to reduce the need for spending costs to hire skilled persons such as tax consultants.