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Tackling tax: how to build the (VAT) habits of a lifetime

Bas Verplanken, Emeritus Professor of Social Psychology at the University of Bath, presents Tackling Tax: how to build the (VAT) habits of a lifetime

7 min read

By Bas Verplanken, Emeritus Professor of Social Psychology at the University of Bath

Bas Verplanken

Bas Verplanken is Emeritus Professor of social psychology. He had positions at universities in Leiden and Nijmegen (The Netherlands), and Tromsø (Norway), and has been at the University of Bath (UK) since 2006. 

His research interests include the environment, health, and consumer psychology, and he has a particular interest in attitudes, habits and behaviour change. He served as an Associate Editor of the British Journal of Social Psychology and Psychology and Health, and was the Head of Department of Psychology at the University of Bath from 2010-2016. 

The Making Tax Digital deadline is just around the corner. Despite the fact that April 2022 is just months away, 66% of UK SMB owners still aren’t compliant. But compliance can’t happen overnight.

This guide aims to support you in complying with Making Tax Digital (MTD) for VAT Returns by building long-term habits. Habits form when you frequently and regularly conduct a task, and protect against forgetfulness, procrastination, and even fear by making your tasks part of your daily or weekly routines. We’re used to creating habits in our daily lives, so why not use the same approach for your business?

The science

Habit formation entails a gradual hand-over of control from conscious decision making to the automaticity that characterises a habit. This occurs by repeated and consistent performance of behaviour in recurring situations. Behavioural science teaches us that this shifts behaviour from being driven by attitudes to being triggered and controlled by the performance context. Planning this ‘context’ requires you to set up the environment and circumstances for doing your tasks. 

Your motivation

Building these habits will take away your worries about adhering to the new MTD legislation, enable you to complete your VAT Returns on time in the format required by HMRC, and put you in full control of your business. Taking the necessary steps will not only help you to adhere to the law, but also make you a happier business owner. 

Research shows that habits are stronger the more they become part of someone's self-identity – in this case your identity as a business owner. Reflect on this for a moment. Realise that investing in the right habits around digital tax returns shows you care for your business.

Old habits and routines

Think for a moment on how you have done things in the past. How did you handle your accounting and VAT submissions? Did you use a notebook, a spreadsheet, or an old shoebox? Were you struggling, and overcome by procrastination? 

Compare that with what you expect from digitising your tax returns process – will this make running your business easier? Will it alleviate some of the stress and worry you feel? Will it help you do them on time, or further in advance?

Worries

Would you rather have one problem or two? One worry is set in stone: you must pay taxes – as frustrating as it may be. But you can avoid a second problem: worrying about it. 

Worry is wasted time. Small business owners spend on average four hours a month worrying about their VAT Returns, with one in five spending the equivalent of at least an entire working day worrying about it each month.

This worry may make you feel overwhelmed and cause you to procrastinate. Failure to act then causes even more worry – it’s a vicious cycle. But building the right habits and taking advantage of the right tools can help you let go of these worries, and even bring joy when you know that all is taken care of. 

Planning: The four steps to habit formation

Consider the following tips as 'scaffolds' that will help you to set up long-term digital tax habits. The conditions for each person and business will be different, so while habits thrive by frequent performance in a recurrent situation, you also need flexibility and the ability to make these habits work best for you. You need to find your 'sweet spot'. 

1. Specify 'what'

We all know that vague plans easily get waylaid. That’s why you should select the key, simple tasks which you need to perform regularly, such as uploading expenses, generating invoices, and checking your cash flow. A habit needs to be simple (leave more complex tasks for later), specific (e.g., "upload expenses", rather than "doing my administration"), and doable (e.g., regularly inputting a few invoices rather than waiting for a large amount to be processed). Don't select too many tasks – just the most important few.

2. Specify 'when'

‘When’ is crucial when we’re planning our habits. Specify when exactly you will do every task. Different tasks don’t necessarily have to be done at the same time, but depending on your circumstances, combining them may be efficient. 

Find a time trigger, which will initiate the performance of the task. A time trigger may be a specific day and time, for instance 'generating invoices on Thursday mornings at 9AM'. If your week is less predictable, find a specific event to use as a time trigger, for instance 'returning from a client meeting' or ‘with my first cup of coffee’. A time trigger may be logically linked to another event ('upload expenses right after travelling'), whereby other events or routines function as the scaffolds for initiating your task. Most importantly, make sure the time trigger is clear, distinct, and happens regularly.

3. Specify 'where'

It may seem trivial, but it's not: specifying where you will perform a task creates a mental image that will help you to start your task. Is this your office, at home, or while travelling? Choose a place where you can work without being disturbed or interrupted, where you enjoy spending time, and which remains stable over time. This place will be your place trigger. Together, the time and place triggers provide a powerful signal for you to perform the task. 

4. Specify 'how'

To give you the clearest vision of how to achieve it, it’s important to plan how to perform the task. For example, will you use a PC, laptop, or mobile phone? Will you do it alone or together with a colleague? If you enter expenses, will you do that by uploading photos of your receipts or by inputting the numbers manually to digital software?

Putting your new digital habits into practice

Now you know how to build the right habits, it’s time for action, and to see whether the plans you’ve put into place work. The more comprehensive your planning, the faster your habits will feel like a natural part of your routine. 

1. Trying out

Consider the first couple of weeks as a try-out period. Find out if what you have been planning works for you. If not, think about why this is the case and adapt your 'what', 'when', 'where' or 'how'. 

2. Repetition and regularity

Initially you will likely need to remind yourself to do your tasks - the phrase "don't ask why, just do it" may be helpful here. By frequently performing the tasks when and where you planned rather than deliberating, these will gradually become automatic actions. Your time and place triggers will get you started.

3. Watch out for old habits

There are times when it will be easy to slip into old habits again, such as when you find yourself under time pressure or faced with a new challenge. What’s important is that you recognise this and stick with your plan – April 2022 isn’t far away, and compliance is mandatory. If this means disposing of the old spreadsheets and shoe boxes, do it.

Looking back and ahead

1. Keep a bird's-eye view

Although you may have established strong habits, make sure you keep an overview of your administration. Be aware of milestones such as VAT submission dates – and ensure notifications are set up to remind you. This is where financial management software like QuickBooks will be helpful – taking the pressure off you and allowing you to spend your time and energy running the rest of the business.

2. Thoughts and feelings

If you used to get negative or anxious thoughts around filing your VAT Returns, reflect on whether you still experience the same feelings. Think about your original motivation: your new habits are the tools you have created to make your work more efficient and satisfying. Be proud of this, and realise your business is thriving because of it.

3. Moments of reflection

Occasional moments of reflection will be needed to make sure you are on track. Plan some moments to reflect on your new habits and routines at a distinct time, for instance when you have finalised a VAT Returns cycle. Review your new habits and routines, check how strong they are, whether they are efficient and 'stress-proof', and whether you want to make any changes. 

Here is a tool to test how strong your digital tax habits are – the Self-Report Habit Index. Do this test after every quarterly VAT submission, to keep on top of your new habits. For each of the four questions select the number that best expresses what you feel, and add them up. This is your habit score. The higher the total, the stronger the habit. Make a note of it, so you can compare it over time, until your habit is built into how you run your business.

Using my digital tax programme is something…

The road ahead

As much as it may feel like an extra burden, the Making Tax Digital regulation is designed to help small businesses save time and help improve the accuracy of      their VAT Returns, through digital software. Nailing the regular small actions for your VAT Returns will really help you make the most of this change, rather than continuing to let VAT overwhelm you. 

Accountability is key – you have to be your own champion as well as your own critic to ensure your VAT habits never fall by the wayside. These ‘Tax Hacks’ will help you to not only comply with the Making Tax Digital deadline, but also to create a less stressful, easier VAT Returns process every quarter – and run the most successful business. 

References

Verplanken, B., & Orbell, S. (2022). Attitudes, habits and behavior. Annual Review of Psychology, 73. https://www.annualreviews.org/doi/10.1146/annurev-psych-020821-011744.

1Verplanken, B., & Sui, J. (2019). Habit and identity: Behavioral, cognitive, affective, and motivational facets of an integrated self. Frontiers in Psychology, 10, 1504. 10.3389/fpsyg.2019.01504.

2Lally P., et al. (2010). How are habits formed: Modelling habit formation in the real world. European Journal of Social Psychology, 40, 998-1009. https://doi.org/10.1002/ejsp.674

3Verplanken, B., & Orbell, S. (2003). Reflections on past behavior: A self-report index of habit strength. Journal of Applied Social Psychology, 33, 1313-1330. https://doi.org//10.1111/j.1559-1816.2003.tb01951.x

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