New report lays out digital roadmap to £57bn productivity payout for UK SMEs

London, UK - 26 February 2019

A new report published today 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, the renowned independent economic consultancy in association with Intuit QuickBooks, the world’s leading 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 spillover 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, whilst a traditional small business with 10-49 employees will see an average increase of £18,000 to their top line growth.

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 to 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 said: “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 cash flow 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.”

The full report, and sectoral and regional breakdowns are available on request.

Sources

[1] Independent research of 500 small businesses, conducted by Opinium for Intuit QuickBooks in February 2019: 82% of small businesses eligible for MTD were aware of the legislation.

The report was independently written and produced by Volterra Partners following a commission by Intuit QuickBooks and was released in February 2019. For full details and sources, please refer to the complete report.

The UK productivity problem

• Productivity is important because it is the key determiner of economic growth – which in turn contributes to increased living standards.

• UK SMEs are particularly unproductive compared to SMEs in other OECD countries. The gap in productivity between the top and bottom ten percent of firms is 80 percent larger in the UK than in the US, France and Germany.

• There are also regional and sector gaps within the UK: London outperforms the rest of the UK and Wales performs particularly poorly. The retail sector performs particularly well.

Registered and unregistered businesses

• Businesses with a turnover above £85,000 are required to register with HMRC for VAT. Businesses that don’t meet this criterion can optionally register. Other businesses will count as unregistered in the model.

About Volterra Partners:

Volterra is a niche consultancy specialising in the economics of property and transport development. Our economic consultants apply cutting edge economic, behavioural and scientific analysis to forge a new perspective on business and public issues.

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