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Digital roadmap to £57bn productivity pay-out for UK SMEs

26 February 2019

A new research report has laid out a digital roadmap that could catalyse up to a £57bn productivity pay-out 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. If all SMEs in the Manufacturing sector were catalysed by MTD, the sector would see an annual benefit of £1.1bn.

These are the major findings of The Productivity Pay-out: UK Small Businesses and the Digital Economy – a new research report and first of its kind economic model released today by Volterra Partners, the independent economic consultancy in association with Intuit QuickBooks, an accounting software provider.

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 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, one in five SMEs in Manufacturing are still unaware of MTD and its associated impact.

The impact for each type of small business in the UK is stark, with MTD delivering a spill-over productivity pay-out regardless of size. For sole traders, the predicted 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. The average gain for businesses in the Manufacturing sector is the highest of all UK sectors at £8,100year.

With no further rollout of MTD beyond VAT-registered business, and no other action by government or industry, the model predicts SMEs across the UK 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 pay-out 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

Chris Evans, VP and UK Country Manager at Intuit QuickBooks said: “Now is the time for small businesses in the Manufacturing sector 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.”

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.”

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