· HMRC’s Making Tax Digital (MTD) has power to catalyse first £6.9bn annual benefit, or £46bn over five years
· MTD creates ‘digital snowball’ for SMEs by driving so-called spill-over productivity benefits
· New model shows roadmap beyond MTD to £57bn over five years
A report sent to The UK Newspaper has laid out a digital roadmap that could catalyse up to a £57bn productivity payout for UK SMEs over five years. Making Tax Digital, the digitisation of VAT in April 2019 will immediately catalyse an annual benefit of £6.9bn, or £46bn over five years in net gains in turnover and growth for the UK economy.
These are the major findings of The Productivity Payout: UK Small Businesses and the Digital Economy – a new research report and first of its kind economic model released today by Volterra Partners, an independent economic consultancy in association with Intuit QuickBooks, a cloud accounting software solution.
This new economic model – built on predicted behaviours of small business owners as a result of social and financial drivers – demonstrates that once businesses integrate technology to become MTD compliant, a ‘digital snowball’ effect is likely to occur as they experience so-called spill-over benefits.
These spill-over benefits will drive increases in SMEs’ levels of productivity, for example by better enabling better cash flow and human resources management, and freeing time for more productive activities such as sales, marketing or training. Having adopted one form of digital technology, businesses tend to adopt others, in turn saving more time and reaping the rewards from cumulative productivity benefits from digital interoperability.
Despite the huge gains to be made from the adoption of digitisation of traditional business practices, independent research by QuickBooks reveals that roughly one in five SMEs are still unaware of MTD and its associated impact[1].
The impact for each type of small business in the UK is stark, with MTD delivering a spill-over productivity payout regardless of size. For sole traders, the predicted average net gain in annual revenue is £1,900, whist a traditional small business with 10-49 employees will see an average increase of £18,000 to their top line growth.
Predicted increase in annual turnover (£) if all SMEs experience a catalyst to adopt all digital processes within financial management software
Source: Volterra Partners
Unregistered businesses are not registered with HMRC for VAT or PAYE. Sole traders are registered for VAT but not PAYE.
With no further rollout of MTD beyond VAT-registered business, and no other action by government or industry, the model predicts SMEs will see a total productivity gain of £46bn over the next five years. If industry, government and SMEs themselves work together to catalyse further growth of the ‘digital snowball’, the total productivity payout is predicted to be significantly higher at £57bn over the next five years.
The roadmap to delivering the £57bn includes:
· The continued rollout of MTD beyond the first wave as currently proposed but not finalised
· Integration of Open Banking into Financial Management Software
· SMEs collaborating with the software industry on training and support
The spill-over effect has the power continue past the £57bn as businesses realise the full potential of digital and adopt further software and behaviour change such as digital marketing or machine learning.
Chris Evans, VP and UK Country Manager at Intuit QuickBooks told The UK Newspaper: “Now is the time for small businesses to embrace digital with unabated optimism. Today’s report highlights that a digital-led approach will be transformational for small businesses, who are the backbone of the UK economy.
“For those businesses, the transition to digital will not be without stumbling blocks. However, it presents a huge opportunity to streamline operations, drive efficiencies and simplify tax. It will enhance cashflow management and allow them to get paid faster and access capital to grow, powering prosperity across the UK.”
Regional and sector observations
The model predicts the largest productivity benefit of digital adoption will be felt by London and the South East. It also predicts that the wholesale and retail trade, construction, professional and manufacturing are the sectors that will see the biggest impact on productivity growth.
London sees the highest average regional potential benefit per business of £5,700/year, and the North East sees almost as much with £5,300/year.
Manufacturing sees the highest average sector potential benefit per business of £8,100/year, and Retail sees almost as much with £7,600.
High levels of competition in built-up cities such as London, as well as in the retail sector, has driven wider adoption of digital – and higher productivity – in these areas of the economy. Since a substantial proportion of the productivity increase is derived from time saved, businesses that are already more productive are able to take greater advantage of that extra time.
Andrew Chamberlain, Deputy Director of Policy and External Affairs at the Association of Independent Professionals and Self Employed said: “This report sets out a clear and positive view on the benefits that digitisation can bring, not just to self-employed businesses, but to the economy as a whole. But there are challenges too. The roll-out of Making Tax Digital must be carefully handled to ensure businesses can transition to digital systems over a sensible time frame and with considerable support from both government and industry.”
Michelle Kennedy, Co-founder & CEO@peanut_app said: “Digital tools are absolutely essential to any business looking to grow and succeed in such turbulent times. Businesses who fail to adopt digital-first thinking risk losing the agility other businesses gain when they are more open to using digital behaviours. Without a progressive tech mindset, companies across the spectrum of industry may significantly hamper their prospects of long-term growth.”
