What are Business Compliance costs?

Posted May 26th, 2007 by Dr James Pratt

Compliance costs are the administrative and time costs of complying with legislation (e.g. the time and resources involved in working out tax or holiday payments) as opposed to the substantive costs imposed by legislation (e.g. the amount of tax to be paid or the amount of holiday pay to be paid).

Compliance costs of a regulatory proposal are only those additional costs that arise from the proposal. They do not include costs from activities that would have been carried out anyway. Overseas studies have estimated direct compliance costs at between 4-12% of a country’s GDP (OECD 1997).

Businesses can also incur higher compliance costs than necessary because of poor management systems and skills, due to lack of experience, capabilities or equipment.

It should be noted that compliance costs will never be – and should never be – zero. A certain level of compliance is actually beneficial for a business, such as updating financial records. However, when the level of compliance negatively affects the day-to-day operations of a business then changes or other options need to be considered.

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