Research and analysis

SME longitudinal ethnography — research

Published 5 June 2025

Prepared by IPSOS for HMRC

Authors: Angus Smith and Heidi Hasbrouck (Ipsos)

Report Number: 796

August 2024

Disclaimer: The views in this report are the author’s own and do not necessarily reflect those of HM Revenue and Customs.

Executive summary

Background and context:

HM Revenue and Customs (HMRC) is the UK’s tax and customs authority. HMRC’s purpose is to collect the money that pays for the UK’s public services and help families and individuals with targeted financial support. HMRC’s strategic objectives set out how we make the tax system work effectively for all customers, who experience the tax system in different ways. HMRC’s objectives are to collect the right tax and pay out the right financial support, make it easy to get tax right and hard to bend or break the rules, maintain taxpayers’ consent through fair treatment and protect society from harm and support wider government economic aims through a resilient, agile tax administration system. 

Small and medium-sized businesses (SMEs) have many responsibilities, tax being just one of them. HMRC is committed to reducing the tax burden to ensure that tax is straightforward and hard to get wrong. To better understand the factors, attitudes and behaviours influencing SME decision-making, HMRC commissioned Ipsos to conduct research with SMEs to understand how tax intersected with the day-to-day running of businesses.

This study explored the SME day-to-day experience and identified areas in which SME owners wanted HMRC to align and integrate tax with the running of their businesses. The study involved an exploratory, qualitative, ethnographic approach to observe SMEs in their own environments. The research, which took place from March 2022 to August 2023, involved SME business owners with a range of employee numbers and sizes, from different sectors and locations across the UK. The findings were illustrative, rather than representative: they highlighted challenges and insights that are likely to be true for many small businesses in the UK, in a qualitative rather than statistically generalisable manner.

Research approach:

The study used ethnography, an approach from the social sciences involving observation of the participant’s natural setting, to provide detailed insight into the lives of SME owners and bring a customer-led perspective to HMRC decision-making and approach.

SME owners and key decision-makers shared self-recorded films showcasing their lives both as SME business owners and outside work, as well as their routines, over the course of 17 months. Within these routines, SMEs demonstrated their opinions, decisions, habits, and relationships. This footage was provided in response to tasks and overarching questions designed by Ipsos and agreed by HMRC. The footage, and the in-depth interviews conducted alongside them, became the data of this research.

Because the sample reflected a variety of business ages, sizes, sectors and locations, this report was illustrative of SME experiences. However, this report was not intended to be statistically representative of the SME population in the UK. Where statistical research aims to make generalisable, reproducible statements about the world, ethnographic research aims to describe a culture, a place, or a group of people through immersive detail.

The study’s 20 research participants were meant to be illustrative, but not representative, of SMEs as a whole. Throughout the report, we use case studies to illustrate points made. A case study is a descriptive portrait of a participant who embodies a broader idea; case studies aim to turn broader, strategic insights into concrete, human stories.

In the course of the research, it became clear that there was greater explanatory power in the attitudes and ’philosophies’ of SMEs and their owners than in their demographic profiles. Micro-businesses (5 to 9 employees) were observed to have very similar challenges around tax to small (10 to 19 employees) and medium-sized businesses (20 to 50 employees).

Themes and insights:

The sections which follow draw out the key themes and insights from the study and are standalone chapters in the report.

Ebbs and flows within the lifecycle of an SME

Data provided by SMEs taking part in this research demonstrated that businesses grew in unpredictable ways. Ideas and experiences of growth and progress were not always linear. Some of the SMEs in this research did not exhibit a great deal of forward-planning or strategy in terms of how they changed or grew. This was partially because of short-term emergencies and other challenges in SME life that made planning for the future difficult.

Growth, progress, and success were defined by participants based on how stable and secure the business felt day-to-day, as much as its financial situation. SME owners’ motivations for growth, therefore, were not just based on a size, sector, headcount, or turnover, but also on their behaviours, contexts, attitudes, and beliefs. The study found that the circumstances in which a business started had a strong influence on how it grew, and the behaviours that become entrenched within that business. Some owners started their business with a strong awareness of, and experience in, management and finance, informed by their education or professional life, but others did not. The SME owners in this study had preconceived ideas about what owning a business would feel like or entail, and not everyone went into business with clarity on what is required of them by HMRC.

For the businesses in this research, decisions were driven by the personal narrative, or story, that the owner had formed around themselves and the business. Most SME owners in this study were influenced by a preferred vision of entrepreneurship, and underestimated the amount of administration that would be required in running a business, at least when they first started. SMEs provided examples of podcasts and books that encouraged individualistic, entrepreneurial thinking, and the belief that the SME owner was responsible for all the successes and failures of the business as a whole. These ideas and beliefs made it difficult for SME owners to ask for help, both with regards to tax and to the running of the business more generally.

These personal stories and cultural ideas that informed SME behaviour had both positive and negative implications for tax and other obligations. In some cases, the urge to be entrepreneurial caused some businesses in this research to minimise the importance of tax and focus on more creative endeavours. However, that same urge caused other business owners to see tax as an important signifier of the legitimate and well-run business they had built.

The complexity behind ’growth’ among the SMEs in this research challenged the idea that businesses developed, or wished to develop, in a uniform or linear way. SMEs in this study felt that there is a lack of proactive communication and tailored support from HMRC, such as relevant advice or reminders that reflects the changing nature of their particular business.  However, the business owners in this research struggled to articulate precisely what this proactive support might look like, or from whom it should come. They expressed frustration that they had to seek out information about tax and work out for themselves how to satisfy the obligation presented to them. As a particular example, engaging with SMEs in this study revealed their anxiety around surpassing Value Added Tax (VAT) thresholds. For the SME owners, the threshold felt difficult to predict or account for, and SMEs in this research were observed attempting to slow their growth to avoid passing into VAT-eligible territory before they were ready. However, VAT is not alone in this regard. Businesses in this research were observed struggling to anticipate the administrative impact of taking on more staff, or of making investments in new assets and infrastructure.

Relationship excellence

Different relationships that SMEs had with their suppliers, customers, advisors, and staff were observed, including the relationship they had with HMRC. The study found the relationship between SMEs and HMRC was uniquely unbalanced, even compared to relationships with other authoritative bodies and organisations. Many of these SMEs’ experiences of interacting with HMRC had led to the perception of a negative relationship, which directly shaped SMEs’ behaviours in relation to tax. The SMEs who took part in this study avoided the issue of tax because it could bring about feelings of stress and anxiety. This anxiety has led participants to avoid contacting HMRC out of fear, even when it has been necessary or urgent to do so.

An important point that emerged from this research was the idea of reciprocity and equal relationships. The SMEs in this research did not feel that HMRC trusted them to be honest or forthright in their dealings with the department. Reciprocity emerged as an important value that SMEs wanted to see from HMRC: that HMRC should be as prompt and transparent in their dealings with SMEs as SMEs believed they are with HMRC. Businesses in this research expressed frustration that they were expected to respond to HMRC requests much more quickly than HMRC would respond to them.

The examples of relationship excellence SMEs gave were typically from the private sector, and were praised for their promptness of response, tailored service, and proactive approach to relationship-building. In contrast, SMEs were observed going to third-party websites for information and advice about HMRC’s requirements. HMRC’s guidance on GOV.UK was not a preferred or default option. SME owners revealed their frustration and confusion in the face of HMRC guidance, which was not always written in language they were accustomed to.

Mistakes and errors

Running a business can be mentally, emotionally, and physically draining. The SME owners in this research continually felt emotionally and mentally overwhelmed, which made engaging with tax less of a priority. Mistakes could stem from a variety of factors, from human error to more systemic challenges, such as a user making a mistake within an older and difficult to navigate system that the business had in place. Multiple factors can overlap and build up over time, resulting in both one-off and more systematic tax errors. Businesses make errors in tax due to short, medium, and long-term causes.

Short-term causes included sleep deprivation or loss of focus due to difficulties in the business, or indeed elsewhere in the business owner’s personal life. Participants experienced health conditions, bereavements, financial difficulties, and other challenges during this research, all of which could contribute to their making an error in tax or in their other obligations.

Medium-term causes of mistakes and errors emerged as a result of the SME owner’s working style or overall attitude to management. Participants had admitted to being “control freaks,” or struggling to delegate work to other people, which could culminate in mental overwhelm, burn-out or illness.

Long-term causes of tax error were more fundamental: some simply lacked the resources to organise paperwork and financial documents in the way they needed to. The study included businesses who worked with almost entirely paper-based systems, which worked well for the SME in some circumstances, but integrated poorly with HMRC’s requirements. There is therefore a mismatch between SMEs’ ways of working and what those SMEs perceive to be HMRC’s requirements for them: namely that they are expected to get tax right on the first attempt. Other SMEs were observed making changes to their systems not because they felt it benefitted their business, but because it satisfied an external need for compliance with HMRC. This perceived lack of alignment with what were seen as HMRC’s expectations and what the owner considered to work best for their business, and is therefore best practice, was a long-term cause of error.  However, businesses did not express a strong desire to align with HMRC’s requirements in terms of their administrative systems; this was not a strong consideration for selecting or adopting a particular financial system or practice.

What SMEs are searching for

Businesses change almost constantly, and SMEs showed a desire for HMRC to demonstrate an understanding of this when engaging with them. The ‘facts’ of a business, such as its size or turnover, can change in a very short space of time, making SME needs for guidance and advice equally changeable. SME owners and leaders felt that the guidance on GOV.UK does not reflect the diversity and uniqueness of circumstances that they find themselves in. They questioned the relevance of the information provided to them, and while they may not have had a clear vision of what tailored support would look like, they were searching for something more specific.  

SMEs were seeking a more equal relationship with HMRC. They expressed a desire for a change in the tone of communications to demonstrate greater empathy. Businesses in this research were observed to handle numerous challenges and argued for recognition of these burdens by HMRC to help them feel listened to in direct communications.

Finally, businesses would like to see HMRC doing more to contact them after an error on the SME’s side, to correct and prevent errors in the future. The SMEs in this study did not significantly change their tax behaviours in the aftermath of an error. The research has identified that tax errors are a result of a range of overlapping causes, from short-term errors to long-term mismatches between SMEs’ systems and HMRC’s requirements. Where, currently, SMEs feel that support and guidance are focused on avoiding short-term error, there is an opportunity to widen guidance to help them embrace system-wide change that would allow them to integrate learnings from errors made in the past.

Project background

As the UK’s tax and customs authority, HMRC collects revenues from millions of individuals and businesses of all sizes. Different kinds of businesses experience the tax system in different ways. Ensuring that the tax system works effectively for all businesses is essential.

HMRC categorises the tax base into 5 segments: Individuals; Small Businesses and Self-Employed; Mid-Sized Businesses; Large Businesses and Wealthy Individuals.

This report focused on Small and Mid-Sized Businesses (SMEs). There are 5.51 million small businesses in the UK and 36,900 mid-sized businesses. These SMEs represent a major constituency for HMRC, and an important audience to serve well.

SMEs are a particular priority. The tax gap from small businesses is the largest component of the tax gap by customer group at a 60% share in 2022 to 2023. The share of the tax gap attributed to mid-sized businesses accounts for 11% of the overall tax gap in the same period. To reduce the tax gap, a more in-depth understanding of the population is needed.

HMRC commissioned Ipsos to bring in-depth insight from the customer’s perspective. Ipsos used ethnography, an anthropological approach involving observation in the participant’s natural setting, to provide a vivid representation of the customer’s experiences.

Objectives

HMRC articulated 4 overarching objectives for this research. In meeting these objectives, it was important for the research to outline the differences between businesses in demographic terms such as location, turnover, headcount, or sector.

1. Describe, in detail, the factors, attitudes and behaviours influencing SME decision-making.

2. Capture the range of experiences and challenges that SMEs face.

3. Understand SME attitudes towards meeting obligations and complying with regulation.

4. Identify how HMRC can integrate with businesses to achieve their ambition of making tax straightforward and difficult to get wrong.

Methodology

Ethnography is the study of people and cultures in their natural settings. Ethnographic researchers learn about human behaviour through direct observation, relying less on what people say they do, and more on what people do in practice, as well as the context of their lives.

HMRC chose to commission ethnographic research because of its ability to record and explain the emotional, cultural, and contextual underpinnings of people’s behaviour. Qualitative research, such as interviews or focus groups, focus on what people say, or what they say they do. Ethnographic research, on the other hand, can highlight the contradictions between what people say or do, or give cultural explanations for why those behaviours take place.

Ethnography’s core strengths lie in the participant-led nature of the research method. This means that the participants were able to express choice in what topics to discuss, and how to discuss them. Each SME was given the space to show us what matters to them within the confines of the research topic. Ethnographic researchers engaged with 20 SMEs from March 2022 to August 2023.

It should be noted that ethnography is not a quantitative method and therefore is not statistically representative and does not produce numerical data.

As an explorative piece of research, the goal was to uncover the array of ideas, beliefs, behaviours, and contexts that exist around tax, not to assign prevalence to them. Likewise, while differences between businesses by age, size, sector, and location were observed, they are not the focus of this analysis. The aim of the study is to articulate the lived experience of SMEs holistically.

Case studies are used to highlight real examples of lived experience. They act as the evidence base of this report and highlight facets of SME life that embody broader themes.

To ensure the study was logistically feasible, and compatible with participants’ busy lives, data was collected digitally, in a process called digital ethnography. It involved providing the participant with a series of prompts, based on which they film videos of themselves and their daily lives.

Qualitative sample

In ethnographic research, the sample size of 24 SMEs used in this study is sufficient for tentative conclusions to be drawn about differences between different types of SMEs. It was possible to purposively select SMEs according to key sampling criteria to ensure maximum diversity of experience across the sample.

 The sample was constructed according to the following quotas and criteria:

• all businesses to be owner-managed businesses
• all participants to be the business owner or key decision-maker within the business
• a mix of digital and paper-based businesses
• mix of operating lengths across the sample including:
  1. minimum x3 operating for less than 1 year.
  2. minimum x3 operating for 1 to 5 years.
  3. minimum x3 operating for 6+ years.
• recruit from a spread of locations across the UK including:
  1. minimum x1 from Scotland.
  2. minimum x1 from Wales.
  3. minimum x1 from Northern England.
  4. minimum x1 from Southern England.
  5. minimum x1 from The Midlands.
  6. minimum x1 from Greater London.
• ensure a representation of both rural and urban locations

Businesses were recruited according to these quotas. Suitable participants were identified through a recruitment questionnaire, designed by Ipsos, and agreed with HMRC. Potential participants were then taken through an audition task: a short video exercise to establish their suitability for participating in the research. This also served to minimise attrition, by ensuring that only the most engaged participants came to the research proper.

Data collection

Participants first took part in an hour-long, introductory interview. This interview established the facts about their SME, their initial thoughts and feelings towards tax and other obligations, and the challenges and opportunities they faced. They were then invited to join an online research platform which allowed them to upload text, films, and photographs in response to prompts.

Data collection was longitudinal over 17 months, from March 2022 to August 2023. Within the data collection period there were four ‘dips,’ or phases, each lasting approximately 2 months. The participant completed an hour-long wrap-up interview at the end of each dip. Throughout the fieldwork period, HMRC shared existing knowledge and expertise on SMEs to guide Ipsos to identify relevant topics to explore. Each dip had a topic of focus:

• dip 1: introduction to the business, participant, and key individuals within the business
• dip 2: deep dive into business systems, key internal processes, and SME owner’s priorities
• dip 3: ideas of growth and process and tax knowledge and behaviours
• dip 4: relationship with HMRC, ideas of effort and taking care

No specific questions were developed for each wrap-up interview: the conversation was open-ended and based on the responses given in previous stages of the research.

This staged process was essential for building rapport. The business owners in this research were encouraged to film tasks with key personal and business relationships which meant data was collected from a range of different people within a given business. Consent forms were completed by all participants and their colleagues involved in the films.

The data collection process focussed on observing both the high and low points of owners’ lives. Researchers witnessed moments of triumph and distress. Ipsos would like to thank all of the participants who participated: this research would not have been possible without their transparency and openness.

Data analysis

Ethnographic analysis is a collaborative process between the researcher and those being researched. Participants were given the time and space to tell Ipsos what mattered to them and where their priorities lie: this is ‘participant-led’ research. In total, across the 4 dips, participants provided over 180 hours of footage to researchers.

Researchers then carried out a holistic analysis process of all video data provided, which involved visual, contextual, and narrative analysis. Researchers first categorised the video data into three categories:

• what people say, or their opinions, professed beliefs, and self-described habits, relying on their conscious understanding
• what people do, or their behaviours and habits, is more observational. Gaps were observed between what people say and what they do. These ‘say-do gaps’ are a quintessential part of ethnographic analysis, and much of the analytical approach revolved around explaining why these gaps existed
• finally, what people see, or their culture, influences, and circumstances, had a considerable impact on business behaviour. SMEs showed us what books they read, what websites they visit, who they trust as advisors, and what their cultural background is

Figure 1: Fieldwork, analysis and bringing data to life

Figure 1 shows three separate boxes, in the first box entitled Fieldwork are 3 circles with the word SAY, SEE, and DO in each. In the second box entitled Analysis the 3 circles overlap to form a Venn diagram, showcasing the overlap of the three words, SAY, SEE, and DO. In the third box entitled bringing data to life, is a zoomed in look at the centre of the Venn diagram with a film play button in the middle of it.

From this initial categorisation, the research team carried thematic analysis by coding reoccurring points to identify emerging themes. As part of this analysis process, the video data was condensed, and individual video clips were then sorted into playlists aligned to each theme. This is akin to qualitative data-coding, using video instead of written transcripts. These playlists served as the evidence base of the research.

To bring the research to life for HMRC and their stakeholders, Ipsos curated ‘thematic playlists’ to showcase examples of each theme within each dip. Themes were established through close viewing of the SMEs’ footage and collaborative analysis with researchers and HMRC.

Throughout the fieldwork period the themes identified in each dip were adapted and merged to form the three central chapters of this report.

1: Ebbs and Flows Within the Lifecycle of a SME

1.1 Chapter summary

“I don’t clock off. I can be standing at the side of my son’s football match sorting out calls and speaking to clients” (Charlotte)

This chapter explores the journeys that SMEs took and the role of the SME owner as the driving force behind the direction of the business as well as its behaviours. The core finding was that businesses changed frequently, unpredictably, and not always deliberately.

The SME journey could be unpredictable, and SME owners found themselves reacting and learning on the job. This could be due to the lack of planning that goes into starting a business. New and potential SME owners did not always have clarity on what being a SME owner was really like. For example, some SME owners started their business with a heavy focus on product or innovation, or on  personal ideals of entrepreneurship, rather than on the tax and financial obligations they would find themselves facing.

Much of how a SME operated and behaved was determined by the personal narrative, or story, that the SME owner had built around themselves and their business. The SME owners in this research were observed to be guided by the concept of entrepreneurship when building their personal narratives. For instance, podcasts about entrepreneurship were a popular source of information amongst participants. These narratives could be more individualistic and place a lot of responsibility on the SME owner, creating a culture in which asking for help is not acceptable.

The narrative that the SME owners in this research held was a strong indication of how they viewed and approached their responsibilities. Responsibilities that aligned more with what they believed a successful business owner looked like were prioritised over those that were deemed as less entrepreneurial. Tax did not resonate in the same way as other responsibilities, such as employee management or corporate social responsibility.

Ideas of progress and growth were not linear, and SME owners’ vision of the future and idea of success varied. Growth, progress, and success could be emotional, financial, context- and situation-based. Much of this was measured based on the business owner’s intuition and common sense, rather than on financial metrics.

1.2 Motivations for starting and working in an SME

To understand the challenges SMEs faced, and their overall approach to operating, it is important to understand the motivations owners have for starting a small business in the first place. The study found that SME owners do not always start their businesses on purpose: rather, businesses were founded based on circumstance. In telling the stories of how their businesses began, owners sometimes described it as something that “happened to them” due to circumstances or experiences, rather than something they made happen.

Businesses taking part in this study did not always have ‘roadmaps’. There was not always a defined strategy or goal to running a business, and where there was, the unpredictability of external circumstances could make achieving it impossible. As a result, a business’s behaviours and systems could be unpredictable. The size or age of the business did not always guarantee a systematic approach to tax. Some SMEs were founded with the belief that intuition yields better results than strict planning. This belief can persist well into the lifecycle of a business and explains a great deal about how businesses taking part in this study act in the present.

OBSERVATIONS FROM THE FIELD

For one care agency, starting a business was a way for the owner to fulfil her care responsibilities to her son and earn an income for her and her family. For a food manufacturer, the owner’s wife’s health was saved by the very products they later went on to sell. The owner’s father was a small-business owner, and had entrepreneurial leanings, but the core origin story of the business began in unexpected circumstances.

1.3 The narratives of SME ownership

“I’m not a control freak but handing over that trust and delegation responsibility is a bit of a struggle, which is why I will probably be on site a lot more than some people in a similar position.” (Mark)

While business owners could pride themselves on a spontaneous, almost improvisational approach to running a SME, there were still narratives at play that, unconsciously or otherwise, motivated their behaviour. In psychology, anthropology and sociology, a personal narrative is a system of thinking that enables people to explain their actions to themselves and other people through stories (Ewick and Silbey, 1995). SMEs were no exception to this principle, and their owners and leaders devised powerful and diverse personal narratives for their work. SME owners had a strong attachment to their personal narratives: how they saw themselves impacted their approach to running their business.

OBSERVATIONS FROM THE FIELD

Business owners were observed prioritising the tasks that brought them personal satisfaction and fulfilled their emotional needs. One SME owner spent a great deal of time personally responding to customer feedback because he enjoyed it, but also because he believed it was something he did well. In his personal narrative, it was important for the owner of a business to be customer facing, and he took great personal pride in how he wrote and how he came across to the customer. While this may not be the expected or typical behaviour of a Chief Executive Officer (CEO), it fit his personal narrative of how a CEO ought to behave.

A CASE STUDY ON LEARNING ABOUT ENTREPRENEURSHIP:

Café owner Alex spent his free time listening to podcasts and reading materials from owners and CEOs of large businesses. He particularly connected to ‘rags to riches’ stories of businesses that started from nothing and defied the odds. These inspirational stories drove how he chose to manage the business: he had chosen his logo because it was “franchisable,” and he took much of his advice on running the business from these podcasts.

He drew motivation and also inspiration from these materials, and they fed into his ideas of what a successful entrepreneur looked like. The motivation behind his quick expansion plans came from hearing from successful business owners’ journeys and their call to action of needing to ‘strike whilst the iron is hot.’ His long-term plan is to have ten sites all operating without much input from him. In this vision, he planned to maintain a hands-on approach, such as regularly dropping in and occasionally serving customers.

As a result of these narratives, owners had a strong, inbuilt sense of how their business ought to be run. SME owners built their businesses as a reflection of their own beliefs and philosophies about what being a good business owner means, and what being an entrepreneur should look like. Their definitions of success, failure and best practice took root in the business and influenced it in virtually every facet of its operations. These existed throughout the entire culture of the SME, from the owner downwards. However, the research participants had been through a range of personal and professional trials over the past 17 months. By the end of this study, their personal narratives for how the business ‘should’ be run were tested and, in some cases, changed. SME owners can grow and change over time, which means behaviours and motivations may change accordingly.

Throughout the research, a range of these personal narratives for doing business were encountered. The most dominant narratives are listed below and formed the basis of their ideas of entrepreneurialism. In each case, this report has adopted the language and tone used by SME owners and leaders: these narratives are described in the manner the research participants explained them to us.

Responsibilities to employees

“My job as the business owner is to make my colleagues’ job as easy as possible and make them as happy as possible so that they are more productive. And that benefits all of us​.” (Charles)

Business owners felt strongly that part of leading a business is the duty of care owed towards employees. This narrative had genuine emotional resonance: some of the sharpest lows businesses experienced during the research revolved around being let down by employees.

• “going it alone”: some SME owners were observed being frustrated with their employees for a perceived lack of dedication to the cause. Some SME owners were pushed to the brink of burnout by the overriding (and sometimes true) belief that they operated without a support network

“I am the motherboard for the business. I keep everything on track, all information filters through me and nothing happens without me.” ​(Aaron)

• “wealth and skills creators”: part of the narrative around being an entrepreneur was around creating jobs in the community and training young people up. Despite the frustrations, SME owners took great pride in how they treated their staff and the opportunities that they offered

Community responsibilities

Some SME owners saw themselves as charitable figures within their community. Business owners did feel the need to help others, within their ability, and the idea of the small business as a community staple emerged strongly in the analysis of SME narratives.

• “community pillars”: SME owners wanted to give back. Some participants had established themselves as central figures in their local communities. Some entrepreneurs wanted to be leaders in the community, and their business let them take on that role. Some felt so much responsibility to their customers that it had a detrimental impact on the business and its profitability, whereas others explicitly wanted to become millionaires. These two discourses could sometimes exist in conflict with one another
• “making the million”: it was also observed that the drive for financial success could create tension between the owner’s sense of responsibility to the community and their desire to succeed financially

Tax and financial responsibilities

Tax does not fit easily into the cultural idea of what a “good” SME owner should do. Businesses did not derive a strong sense of pride, satisfaction, or value from paying tax well. A SME owner could perform their tax obligations poorly while leaving their personal, entrepreneurial narrative intact.

• “creative thinkers”: it should be noted that, overwhelmingly, running a business was felt by participants to be a creative endeavour. Business owners saw themselves as creative, rather than operational thinkers, and coming to terms with the administrative burden of tax could be a genuine challenge. Tax did not feel entrepreneurial. It did not have the same cachet as selling a product, building a brand, or creating wealth. For some, tax could feel mundane when compared to the excitement and romance of being an entrepreneur
• “a legitimate business”: but participants did argue that paying tax could feel like a rite of passage, transitioning from a lifestyle business to something more legitimate and serious

These discourses and beliefs about entrepreneurialism brought a great deal of pride to the SME owners. However, there is an underlying tension at play. The study found that the individualist narrative that some SME owners embodied could result in mental and emotional overwhelm. SME owners could find themselves overburdened because of a distrust in their own employees and a sense of individualism.

Much of the emotional, physical, and mental overwhelm that the SME owners experienced over the 17 months of research could be traced back to their ideas of what it meant to be an entrepreneur and what a successful SME owner ought to look like. When things went wrong, owners’ narratives were tested and challenged.

OBSERVATIONS FROM THE FIELD

One restaurant owner waited in the rain to pick up a young part-time chef who overslept and missed his shift. This reinforced his personal view that employees from a younger generation could be lazy, or unreliable, and that it would be safer to handle menial tasks himself. This conclusion of self-reliance can lead to burnout and exhaustion.

Another owner questioned her ideas of entrepreneurship after an employee resigned referencing the owner’s inability to manage admin and detail in the business. This challenged her narrative that an entrepreneur should be able to do it all: from scheduling, finance and collecting receipts to bigger strategic decisions around expansion. Over eighteen months, this owner changed her outlook and hired a virtual assistant to support with tax and other admin for the business.

The entrepreneurial ideas that business owners in this research held could have an impact on how they tackled challenges, and if and how they asked for help. Doing things independently and without external help was a point of pride for entrepreneurs, and people could struggle to accept help. However, this could change.

“We’ve learnt along the way, and now I’m too old in the tooth, I don’t have anyone to ask; I don’t need to ask. I almost know the answer to the question” (Alexa)

OBSERVATIONS FROM THE FIELD

Businesses in this research have a unique relationship with the outside world: if it is not seen to impact the business, it is not given a great deal of thought. This means they do not always have a bigger picture perspective and cannot anticipate the implications of certain issues or choices on the business.

Wider social contextual issues can be extremely distant, or intimately close, depending on whether it will affect them. Businesses’ view of the world is determined by its likely impact on their ability to operate.

Business communities are “found families;” groups established out of mutual benefit rather than sentiment. Isla has a close relationship with Business Network International, a networking association for business owners, whose aim is to “help members increase their business through a structured, positive and professional referral program.”

Relationships with staff can be highly transactional, even adversarial. Again, the SME owner’s sociocultural context is narrowed by what the business needs at that moment.

1.4 Growth and tax

“I don’t have a growth plan. I’ve made decisions, I’ve done things, and we have grown.”​ (Aidan)

‘Business growth’ defies a single, universal definition. It has variously been described in academic and business literature in terms of revenue generation, the creation or contribution of value to the economy, volume of sales, headcount, or turnover. As such, it is unsurprising that participants did not have unified definition of ‘growth’ (see table on page 17) either. Nonetheless, it emerged clearly that the SMEs wanted to grow, and that they saw this as a vital part of being a successful SME. But what growth looked like, and the type of growth that the SME owners in this study aspired to, varied.

Targets for growth could be vague and could sometimes be better described as a ‘progress’ plan than a growth plan: if processes and quality of output were improving, that satisfied the urge SME owners had to move forward and develop. Growth was described by SMEs as much as a feeling as a material fact: if the list of worries an SME owner came home with had decreased, the business must had been progressing properly.

“We are firm believers in the idea that we are learning, we are prepared to give anything a go. And if it doesn’t work, we will do it again differently or we won’t do it again. But we are very much open to change… I don’t think any business like this can be stagnant.​” (Kristina)

Growth is not always perceived as positive. In the participants’ minds, growth could bring surprises, unanticipated stresses to personnel or the systems they relied on, or more work than could reasonably be taken on.

A detailed or systematic approach to planning for growth, including in mid-sized SMEs, was not observed within this research. An important implication of this is that businesses could sometimes be taken by surprise by changes to their tax obligations. While this research does not provide strong enough evidence to positively support the notion that tax obligations are a particular barrier to growth, some businesses were seen to waver at the prospect of crossing over the VAT threshold. The point of passing into VAT-registrable territory felt unpredictable, and businesses who took part in this study did try and wait until they felt they could do so without suffering from increasing their prices.

Ultimately, a business defined their growth based on how they defined ‘success’, and within this, the nuances of how growth influenced their tax obligations could be ignored or underemphasised. Businesses spoke about tangible (numerical, or financial) growth, and intangible (emotional and personal) growth. These both mattered a great deal, but tax obligations were determined based on the material and tangible facts of a business, such as their turnover. As a result, a business that focused on intangible growth could be caught unawares by the tax obligations that emerged as they grew in turnover. In the examples of tangible and intangible growth below, it should be noted that growth is not without its downsides or problems; nor has it necessarily solved some of the problems businesses expected it to. In reading these examples, further anonymised context on each business owner mentioned can be found in the annex.

Tangible Growth	Intangible Growth
1. Financial growth – increasing profitability. The research concluded just as Isla had achieved her aim of growing her customer base and increasing profit. But her anger at her staff being “paid to do nothing” remained.	1. Personal growth – SME owners may grow as individuals in their skillset or perspective and outlook. Between dips 3 and 4, Lucy had to sell the business. She had taken away some life lessons from this: that she should not have pursued growth so relentlessly, and that perhaps financial motivations should not have been as dominant as they were in her planning. Rapid growth meant she was rushing between multiple sites to cover staff absences. Staffing challenges meant she had to cease business operation altogether. She was fascinated by business strategy but was saddened that she would no longer be able to put this new knowledge into practice.
2. Growth in headcount - increase in employees. Linda’s increase in headcount meant she was temporarily a medium-sized business, but a new employee did not fit her working style. This resulted in a clash of personalities and the new hire eventually leaving.	2. Reputational growth – winning awards or getting accreditation that recognises the business in positive ways. Brandon’s business had maintained steady growth as of dip 4. They continue to rely on their core values of customer service and sustainability, but the real success of the past few months had been the prestigious award they won for ethical business practices.
3. Growth via expansions - additional sites or increased offering. Alex’s success in expanding his café to two other locations had put a strain on the business partnership and on Alex’s personal finances.	3. Relationship growth - stronger relationships with employees or other professionals. The additional investment into a marketing strategy led to Robert hiring a head of marketing after seeing the successes that could come from someone’s sole dedicated attention in one area of the business. Since dip 1, Robert had learned to let go of much of the day-to-day running of the business and delegated to new joiners.

SMEs had their own ideas of what growth looked like. The SME owners in this research were searching for information resources that allowed them to identify for themselves who they were and what they needed. For the SMEs in this research the guidance available online from HMRC on the GOV.UK website felt generic and therefore not suitable for their perceived unique situation or needs. While they did not make specific or detailed requests of HMRC per se, they did have an expectation that HMRC should become more knowledgeable about each business’s approach, goals, and overall needs around tax.

A CASE STUDY ON STRATEGIC GROWTH

Café and catering SME owner Linda (10 to 19 employees) first found success opening a café across the road from a university campus and catered to the student population. Her business had grown since then into two cafés and a catering kitchen.

The first café had seen a significant decrease in profits during the pandemic with fewer students around, and it had yet to recover. Since dip 2 Linda had been talking about selling this café, but because it was the site for the catering kitchen, she was unable to.

She was planning the purchase of another lease for a third café. Her motivations to do so were three-fold: to become established in an up-and-coming area, to bring some much-needed new revenue to keep the business afloat, and to relocate the catering kitchen so that she could finally sell the university café.

1.5 Conclusion

For the participants in this research, part of the narrative of being a SME owner was the belief that their business was unique relative to others, both in terms of how it operated and what it offered. Of the SMEs who participated in this study, when they felt the need to contact HMRC, they did so mostly by phone. This was, perhaps, because it had not been demonstrated to them that HMRC had guidance available that suited their circumstances. SMEs who participated in this research were looking for a customer journey to follow that adapted to the ebbs and flows of their business, through:

• having a working relationship with HMRC from the point of first contact
• HMRC understanding the values and attitudes of SMEs
• help to identify their own goals for self-service through tailored journey-mapping

Tax did not fit comfortably into the SME’s perceived ethos of entrepreneurship. While the SME owners in this research knew (in the abstract) that tax mattered, tax was not felt to be relevant to the business’s overall health. While a business that handles health and safety or payroll poorly would be recognised as dysfunctional by the SMEs in this research, the same logic was not always applied to tax. The SME owners in this study articulated a desire for HMRC to display an understanding of these entrepreneurial values, and empathy and understanding of what being a SME owner was like, as well as what they valued.

• SMEs expressed a desire to understand how compliance with tax helps improve business efficiency

Change is a persistent element of SME life. This can make anticipating problems a real challenge: some participating businesses that feared the VAT threshold expressed a desire for more clarity on or help with predicting what would happen if they were to cross into a different turnover bracket SMEs felt that they did not see the uniqueness of their businesses reflected by the tax guidance in front of them. This led them to seek tailored guidance from HMRC. SMEs said that regulation and guidance would be easier to understand if provided in a flexible and tailored manner. Businesses in this research looked to third parties for advice on HMRC’s requirements. SMEs were seeking varying degrees of explanation behind tax guidance. SMEs were drawn to resources provided by third parties because they had adapted tax information to different levels of understanding, from business owners with no prior knowledge to those who understood tax from their previous professional lives. SMEs could not predict when they would need a certain piece of information, and preferred systems that allowed them to articulate their problem and then signposted them to the relevant solution for that specific situation.

2: Relationship Excellence

2.1 Chapter summary

This chapter will explore the relationships that SMEs had with tax and HMRC and compare these with the ways in which SMEs connected and interacted with other organisations. These comparisons revealed what SMEs perceived as ‘excellence’ and may also serve as potential examples for HMRC to emulate or align with, where appropriate and feasible.

SMEs viewed HMRC as being stringent and severe, which could foster an unproductive environment for complying with tax. Tax was viewed as being strictly regimented by HMRC, but this rigidity could feel oppressive, which led to SMEs reacting to tax and HMRC in emotional ways rather than practically. Tax was not something that SME owners proactively worked on because it could bring about feelings of stress and anxiety. The core finding is that SMEs had a complicated relationship with HMRC as a result of the power dynamic in place between them, and by extension, a complicated relationship with tax. Relationships with other organisations were explored throughout the fieldwork to identify what relationship characteristics SME owners responded well to.

SMEs had many relationships with external partners and organisations, and there were various dynamics at play. Business relationships with organisations could be split into three types:

• a helpful attendant: organisations that offer help or a service; a supplier rather than a partner
• a trusted advisor: collaborators working with SMEs; there is no hierarchy or power dynamics
• a supervisor and sponsor:  organisations or external individuals that hold the business accountable, or supervise them, in some way

The relationship that SMEs had with HMRC could be perceived as unbalanced, even when compared to other organisations that made requests of the SME. Furthermore, this chapter will highlight how negative views that SMEs had of HMRC influenced many of the unintentional, adverse tax behaviours observed in this research.

2.2 Relationship types

To understand SME relationships with HMRC, it was important to first explore their relationships with other organisations. Successful relationships between SME and external organisations were observed to have been built slowly and over a long period of time. It took time for an organisation to be trusted and to be let into the SME owner’s trusted network. Once an organisation became trusted, SMEs would engage with their advice and guidance.

To understand how SMEs related to HMRC, there were some broader principles to establish around how SMEs built, maintained, and grew relationships. Firstly, it was not uncommon for the SMEs in this research to begin operation without a network at the start of their journey. Relationships for SMEs were sometimes built from scratch, often cautiously and with some difficulty.

SMEs just starting out in business anticipated being at a disadvantage; they dealt with businesses that were larger, more established, and sometimes more knowledgeable. In this context, suppliers, clients, advisors, and investors were treasured. SMEs nurtured relationships that safeguarded the business against risk, and valued organisations that advocated for and protected them.  For this to occur, an organisation needed to demonstrate their value and good faith towards the business.

The most successful relationships that SMEs had were dynamic, perceived as equal and with the potential to evolve. Of the relationships observed, SME relationships could be divided into three types:

1. helpful attendants: these were organisations that helped and offered a service or some form of support to the SMEs. These relationships were transactional in their nature, but there was a clear value added, and this made the relationship a worthwhile investment for the SME owner. Some organisations did this well and could become so embedded into the SME’s network that the owner could not envisage operating without them.

2. trusted advisors: these relationships offered a certain level of collaboration, back-and-forth and sharing. SMEs enjoyed these interactions and came away with the sense that their business was improving and developing as a result of that relationship. SMEs and their advisors aligned in terms of values, beliefs, and attitudes. This could give these individuals or organisations significant influence over the SME and its owner.

3. supervisors and sponsors: these organisations brought accountability to SMEs and their owners. One dominant feature of this relationship was the power dynamic at play: some organisations yield more power and control over SMEs than others. But the ways in which regulation was enforced, and guidelines were shared, could determine extent of the SME’s compliance. HMRC was no exception here, and the next section of this chapter will outline potential areas where the relationship with HMRC could be improved based on the models of successful relationships above.

OBSERVATIONS FROM THE FIELD

Examples of helpful attendant relationships were banks and other businesses or organisations that aided in the day-to-day running of the business. These were organisations that they interacted with on a regular basis, and SME owners came to rely on them.

Trusted advisors could be individuals, such as mentors, or organisations, such as business contacts. These relationships offered not only practical advice and guidance but also emotional support. We observed how a hair salon owner valued a supplier’s sales representative so highly, to the point where she would rely on them to make decisions on their colour, service, and product offering. The advice and guidance that was offered was something that the SME owner themselves sought out. On the other hand, the guidance and regulations established by Supervisor and Sponsor organisations resulted in relationships that SME owners did not have a choice in.

Successful Supervisor and Sponsor relationships could be found among authorities concerned with, for instance, health and safety, food safety or local councils. A café owner viewed her relationship with the Food Standards Agency very positively because they offered clear and actionable guidance. She also mentioned how much she valued that if they did not do well in an inspection, the business would be given a targeted list of actions and changes to make before a second inspection was arranged. This second chance and the collaborative guidance fostered a warm relationship.

2.3 Relationship with HMRC

Ipsos observed a uniquely imbalanced relationship between SMEs and HMRC. While HMRC was not the only authority SMEs were observed to interact with, it was the only relationship where a power imbalance was felt, and actively commented upon, by participants.

SME owners found HMRC’s guidelines inaccessible and difficult to navigate. They perceived HMRC as inflexible and rigid in the requests made to them. For example, HMRC was seen as putting deadlines in place without accounting for potential delays in receiving the letter making the request in the first place. This fostered a negative perception of HMRC, which itself emerged as a driver of adverse tax behaviour, such as delays in responding to HMRC requests or avoiding reading HMRC communications. Even experienced SME owners were observed to feel intimidated by HMRC, and rather than taking a proactive or strategic approach to tax, preferred to avoid thinking about it to avoid discomfort or anxiety. Again, this emerged as quite unique to HMRC, as SME owners did not typically avoid thinking about issues of strategic importance to their business.

When it came to tax and HMRC, SMEs viewed almost all communications and requests from HMRC with apprehension. This was not simply emotional; it had practical relevance for how SMEs fulfilled their tax obligations. SMEs relayed that the lack of positive reinforcement or encouragement in HMRC communications had resulted in an instinctive fear of receiving any kind of communication from HMRC. As a result, businesses would prefer to dismiss the issue altogether, in the assumption that if nothing was brought to their attention then nothing could be wrong.

A CASE STUDY ON A DAMAGED RELATIONSHIP:

Foods manufacturer Aidan (10 to 19 employees) had a deep mistrust of HMRC. He saw the relationship as very transactional. The business paid, and HMRC either did not reply or sent them a fine for a late return. As a business, they struggled to remember to send a Pay As You Earn (PAYE) return every month, and if it got missed or forgotten “you don’t get a reminder; you get a fine.”

He did not want to end up on HMRC’s radar for any reason, good or bad, for fear of being investigated or fined. This was, he acknowledges, not rational, but deeply real and a key influence on his tax behaviour.

SMEs did not always know what they were supposed to give to HMRC in terms of the information required for tax returns, or even the types of returns that they needed to make, until they learned that they had fallen short. This fed into the power imbalance that they felt with HMRC: they saw HMRC as both a supervisor and regulator, and as a teacher, and relied on them as such. Most SMEs in this research felt there was an expectation to get their taxes right on first attempt but did not think this was achievable. Instead, some SME owners expected to have to troubleshoot after doing taxes: they were focused on meeting HMRC deadlines and anticipated a need to correct their work or provide more details later. They also expected HMRC to provide guidance after filing to help them get to compliance.

In addition to this, SMEs felt as though there were two sets of rules: one for them and one for HMRC. SMEs knew that HMRC expected immanency and accuracy from them, but this was not reflected in their own experiences with HMRC and its systems. Throughout the 17 months of fieldwork, researchers observed numerous occasions where SMEs were frustrated with HMRC’s systems and slow response rate. This further demotivated them from wanting to be more proactive with tax. Other successful relationships that SMEs had featured a balance of power between the two parties. The relationships that SME owners talked about most passionately were those that evolved and grew alongside their business, such as with their investors, suppliers, and banks.

Another consequence of the imbalanced power dynamic was that filing tax became emotionally stressful. Much of tax was experienced in a state of exhaustion, and significant mistakes in tax gave rise to feelings of shame, panic, and anger. Business owners said that they expected to be rebuked, or even punished by HMRC in a way they would never experience from their more partnership-based associations. This expectation and perception of HMRC stemmed from their previous experiences of, or hearing about, penalties and fines from HMRC.

SME owners relayed that they were overwhelmed and overworked. The desire and preference to call HMRC instead of using other channels was driven by their need to be listened to and sympathised with. SMEs were also driven by a fear of failure. Despite the wealth of information available, they would still call HMRC regularly out of a genuine fear that they had made a mistake. SME owners felt that HMRC’s guidance on GOV.UK was limited in its ability to help SME owners problem-solve or troubleshoot.

2.4 Relationship with tax

SME owners could struggle to engage with tax regulations to a greater extent than other forms of regulation. Regulations that aligned with their entrepreneurial values were upheld more easily than those which did not. For example, the National Living Wage was something that strongly aligned with some SME owners’ core values  (staff must be paid well and on time). Health and safety obligations were another set of regulations that sat comfortably within the SME’s value set. It was a matter of basic principle for SMEs that the workplace ought to be safe, but it was not said with the same conviction that tax ought to be filed in an error-free and prompt manner.

SMEs found the language used by HMRC confusing relative to the language used by other organisations they dealt with. While SME owners did not want to become experts in tax, they did want to be able to speak confidently about it regarding their business. Some SME owners reflected that they struggled to understand what their accountants were talking about, and this was a barrier to working effectively as an organisation. Examples of unclear HMRC guidance are the months corresponding to accounting periods or confusion in employee leave, and maternity and pension entitlements. For the SMEs who took part in this study, there is an opportunity to foster a more productive relationship with HMRC through using language that they were more familiar with from their other business relationships.

Tax was viewed as a system of inputs and outputs by the SME owners in this research: paperwork was filed by someone within the SME, and a response was given by HMRC that indicated ‘success’ or ‘failure’ at the task. Very little was known about how HMRC establishes the correctness of a tax filing, and as a result, the process lacked some core characteristics that would increase engagement with tax:

• meaning: tax was something the SMEs in this research complied with in practice, but rarely responded to on an emotional level. Tax was not felt to signify anything meaningful about a business. It was paid, but not always paid effectively, and idea of ‘doing tax well’ was not championed or advocated for

• simplicity: SMEs thought about tax holistically, but HMRC guidance was centred on different types of taxes.  PAYE, self-assessment, VAT, and corporation tax were perceived to be one combined burden for SMEs. HMRC’s guidance on GOV.UK was difficult for them to navigate, and SME owners were overwhelmed by the amount of information. They felt that rather than guiding SMEs to the relevant information, the website served to create further confusion

• ease: SMEs were interested in engaging with tax in terms of finding efficiencies. However, this was seen as highly complex and usually deferred to a third-party agent. The process felt unclear and was therefore outsourced to an external party who “speaks the language”

• feedback: very few SMEs could clearly articulate why a mistake had happened with tax in their business. There were virtually no lessons learned for the next filing period, and as a result, the process of learning about tax was inconsistent

2.5 Conclusion

Fostering equal relationships

Underlying SMEs’ comments in this study was the idea that their relationship with HMRC needed rebalancing. SME owners in this research viewed HMRC in a negative light but desired a more balanced relationship. They spoke of wanting more explicit and simplified communication from HMRC. Some questioned whether HMRC had an institutional understanding of the reality of being an SME. They argued that more goodwill and reciprocity could be built by showcasing that HMRC understands that being a SME owner comes with challenges, and that tax does not always make the experience easier. This may be achieved through adjusting the tone of voice in communications: participants could be taken aback by HMRC guidance that came across as “accountant speak” and had to go elsewhere for clarification.

Speaking the language

The vocabulary used by HMRC was not easily understood by SMEs. Ipsos saw businesses refer to tax as a collective obligation, as in “the tax man” or “our tax debt.” They were not used to thinking about tax as distinct or separate obligations, and this could lead to friction if HMRC were communicating about a specific duty like self-assessment or PAYE.

SMEs would prefer for HMRC to mirror the language and tone that they are familiar with when communicating with other organisations and suppliers, such as banks or the Health and Safety Executive. The SME owners in this research mentioned a desire for HMRC to assume integrity on the SME’s part and send reminders at the first sign of non-compliance rather than perceived rebukes in the form of fines and penalties.

Learning from the experts

SMEs had high expectations of what successful relationship-building looks like. They were accustomed to prompt and tailored service from their banks, suppliers, advisors, and collaborators. This research identified the continued emphasis that SME owners in this research place on the importance of fundamentals:

• faster and more accurate replies from HMRC
• HMRC to tailor communications and guidance to their changing circumstances
• holistic advice on all aspects of tax
• a desire for HMRC to leverage and identify areas of mutual interest between them and HMRC

Beneath our participants’ frustrations with HMRC, they were willing to see HMRC as a guide and advisor in tax matters. The SMEs in this research saw an opportunity for HMRC to promote tax as a space of opportunity, exploration, and engagement through HMRC developing a more in-depth understanding of the individual’s business’s growth, assets, and structure.

SMEs felt that HMRC guidance is positioned towards avoiding the worst tax outcomes (e.g. prosecution, fines) rather than achieving the best (error-free returns, optimising financial systems). In their view, good tax behaviours are rarely modelled or exemplified for SME owners, either by HMRC or other sources.

3: Mistakes and Errors

3.1 Chapter summary

This chapter will explore the anatomy of mistakes and errors, by identifying the short- and long-term factors that contributed to them. Taking this perspective on the various mistakes and errors that were observed or recalled during the fieldwork creates a more comprehensive view of potential problem areas. Mistakes and errors, whether observed by Ipsos, or recalled by participants in their own words, may not necessarily align with more technical definitions used by HMRC. Over the course of the 17 months, business owners were observed to struggle with the mental, emotional, and physical burdens of running a business. The combination of all these burdens left some SME owners in a constant state of overwhelm, which made engaging with tax less of a priority.

When looking at the anatomy of a mistake, it could be difficult to find an isolated, singular cause. A mistake or error could stem from a variety of factors, from random human error to systemic challenges in the SME’s relationship with HMRC. Multiple causes overlap and could build up over time, culminating in a flashpoint when a mistake or error occurs. Simply looking at the trigger as the sole cause of a mistake would offer only a partial view: the anatomy of a mistake or error could be traced back to the very beginning of the SME’s journey.

Mistakes and errors that occur could be traced across three types of causes:

• trigger causes: these were the most immediate factors that lead to the mistake or error, for example a mistake being made due to sleep deprivation. However, these were not the only reason for an error. A trigger cause had the most direct relationship to a mistake or error but was not the sole reason for a mistake or error to occur
• medium-term causes: these could be thought of as factors emerging from the business owner’s overall approach to work, or their ‘way of working.’ Medium-term causes were early indicators for a potential mistake or error
• long-term causes: these were more systemic and fundamental, for example, the natural working systems that were set up may not be compatible with HMRC systems. These could be traced back to the start of the business and were also harder to anticipate or change as they had become embedded into the business’s behaviour and attitudes

3.2 How businesses ‘act with care’

Throughout the fieldwork period, the SME owners were observed to be attentive and careful toward running their business. Errors, whether in tax or elsewhere, were observed to be a function of exhaustion and burnout rather than carelessness. They were not intentional or anticipated.

In this study, business owners were observed operating in a near-constant state of exhaustion. At various points in the study, some of the SME owners were operating on limited hours of sleep; some were juggling personal health concerns or managing caring responsibilities. Several SME owners had to drop out of the research due to personal illness, bereavement, or business closure. These circumstances made tax difficult because everything related to running the business had become difficult. However, there were opportunities for improvement, and for minimising the administrative stresses of tax relative to the other responsibilities a business inevitably faces.

This intensity of workload was not something that SME owners anticipated when they started the business. Often, they expected running a business to be a primarily creative endeavour. SME owners expected to be seeking out opportunities, building brands, creating products, and mastering leadership skills. They did not expect the physical, emotional, and mental burden that comes with running an SME or fulfilling tax obligations.

The SME owners in this study viewed everything they did as mental effort. Tax was just one of the many things that contributes to that mental effort: it did not feel creative or an opportunity for the SME owner to exercise what they saw as their ‘actual’ skillset. It was one of many chores that required their attention.

A CASE STUDY ON THE MENTAL EFFORT OF DOUBLE-CHECKING:

Nathan, an estate agent, showed us that he took great care over his ‘Deals Spreadsheet’: a master list of all properties on his books and a comprehensive set of features, contact details, reasons for selling the property, lease length, service charge, solicitor approval and so on. All these variables had an impact on the price of the property and therefore the commission they could make from its sale. Ensuring that these factors were known and satisfactory was business-critical for Nathan, and he regularly checked, and double checked, the document. If he did not, his business could suffer reputational damage by failing to disclose something about a property that later turned out to be crucial, or financial loss by selling a property for less than its market value. He had a detailed and close understanding of this aspect of the business precisely because it influenced the profitability and growth potential of the SME.

3.3 The causes of ‘mistakes and errors’

1.Trigger causes

Some of the mistakes and errors that were observed resulted from sleep deprivation or a loss of focus because of something taking place in the SME owner’s personal life.

These causes were immediate, and in some respects inevitable: any employee of any business could make a mistake, but medium and longer-term forces could make these errors more likely, or more harmful when they occurred.

2.Medium-term causes

These are longer term factors that built up over time, which could also act as an early indicator of potential issues and problems that can arise. It was observed that medium-term causes tended to stem from SME owners’ working styles and their approach to sharing the load or delegating.

In the anatomy of a mistake or error, the medium-term cause will build up over time, paving the way for the trigger causes that result in a mistake.

3.Long-term causes

These causes are more systemic and could be traced back to the very beginning of the SMEs journey, during the initial set-up stage. Businesses were observed keeping their digital or paper-based systems in place without regard to how the business had grown or changed. This lack of evolution would mean that SME systems may not be able to adapt as their tax obligations or HMRC’s own systems change. This mismatch emerged as a substantial and fundamental cause of the difficulties our business owners faced with tax.

OBSERVATIONS FROM THE FIELD

One example of a trigger cause that was observed from the field was when Linda had to prioritise getting a doctor’s appointment for a health concern rather than spend time catching up on a backlog of invoices and VAT administration at the end of an accounting period. As a result of reprioritising her time, she missed the deadline and was fined for late VAT payments.

An observed example of a medium-term cause is Isla’s self-confessed “control freak” nature impeding functions across all areas of the business. One area that she demanded control over was the final delivery of reports to clients and invoicing them. This had resulted in the late deliveries of multiple client deliverables and a backlog of invoices needing to be sent to clients.

Long-term causes took some more time to decipher for each of the businesses in the project. One example was how Alex had to learn to do tax and accounting, but only after he had opened three sites.  On all previous occasions, he had a family friend who was a trained accountant to help him manage all the financial, legal and tax aspects of running a business. With the business expanding so quickly, the accountant was unable to keep up and had to step away from this supportive role. When the fieldwork period wrapped up, Alex was learning how to do tax and accounting for the first time, as well as creating a whole new system to accommodate for a business of his size.

3.4 The trigger causes of error

Trigger causes were often tied to the strain that SME owners felt, which led to mistakes and errors being made. These were causes that were most closely related to the immediate circumstances around the SME and the SME owner. The trigger causes that led to tax mistakes and errors were contextual ones. Tax was not done in complete isolation: life got in the way of best practice and error-free work. SME owners were observed to be routinely operating on very little sleep and in high-stress situations. They were not always dealing with tax in a rational and stable state. When exhaustion hit a peak and an error was made, businesses would look to HMRC for help.

When a mistake or error occurred, SMEs were observed to react emotionally and would work hastily to resolve the issue. Letters from HMRC about discrepancies were observed to bring about feelings of dread, anxiety, and stress; even, in one case, to the point of crying.

Businesses had a continuous sense of how to improve most processes, but when it came to tax, the potential improvements were not as clear to participants. SME owners talked about efficiencies, processes, and training in general terms, but few could think of any improvements they could make to their tax approach. In part, this was because tax was reacted to rather than prepared for. Tax was not something that they actively engaged with outside of problems or tax deadlines. For SME owners, tax rarely came to top of mind, unless they had been confronted by an issue.

As a result of this approach, tax mistakes and errors were not teachable moments – SMEs did not learn from them. When SME owners heard from HMRC, they would work to resolve the mistake or error quickly, but that is where action stopped. This created a cycle, in which SMEs were continuously troubleshooting rather than proactively working on improving their tax approach and minimising future mistakes or errors.

3.5 The medium-term causes of error

An example of medium-term cause was the narratives that SME owners had regarding what their role in the business was. SME owners did not always understand the division of labour between themselves and their wider team. There was a distinction between working on the business and working in the business – but this would get blurred for SME owners.

There were two types of tasks that SME owners take on in the business:

• working on the business:  tasks and work that will feed into growth or progression in the business, such as competitor reviews, winning new business and upskilling staff
• working in the business:  working on the day-to-day business, such as covering shifts, providing client services, and administrative tasks

We observed times when SME owners were pulled in both directions, such as finding themselves juggling covering a shift and working with suppliers at the same time.

SME owners had an easier time working in the business because that was what they went into business thinking they would do. For example, participant Linda went into the café business because of her passion for specialty coffee, and often enjoyed working in the café rather than focusing on the strategic administrative work that owning a business entailed. The SME owner’s passion for their business also made delegating a difficult task. This could result in situations where SME owners were stretched too thin, fostering an environment for mistakes and errors to occur.

This was not to say that SME owners never delegated. However, when SME owners in this research delegated, they often delegated fully. For example, once participant Robert brought in a head of marketing, he shifted his focus to winning new clients rather than continuing working on the marketing side of the business.

SME owners often considered themselves to be good judges of character. They placed a lot of trust in certain people, especially professionals such as accountants and others who may have known more about tax than them. They decided what to concern themselves with based on trust, and if a trusted advisor told them something is under control, then they believe it was under control.

3.6 The long-term causes of error

Rituals, Habits, and Routines

Ipsos observed a variety of behaviours from the businesses in this research. These particular ways of working were categorised into rituals, habit, and routine. Understanding these three approaches to work can explain why the businesses behave in the way that they do. As discussed, businesses in this study were emotional ecosystems: they do not always operate according to rational principles, and this applies to their day-to-day operations as much as to their broader approach and strategy.

1.Rituals

Ritualistic behaviours are driven by their emotional value – they are not always pragmatic. These types of behaviours give an emotional reassurance to the individual. These behaviours give the SME owner a sense of comfort and security in addition to the role they play in business functions.

SME owners are ritualistic in their nature. They are performing these tasks to instil ideas and values in the business, with employees and within themselves.

When engaging in more ‘ritualistic’ behaviours, SME owners can struggle to collaborate and share these rituals with others; they are highly personal and not easily shared. SME owners need to make information accessible to employees and other stakeholders so that responsibilities can be delegated, alleviating the burden on the SME owner, and preventing mistakes from occurring. Participants in this study did not always adhere to this principle. Important tasks were kept very closely guarded by business owners, who either felt they could perform them better than their staff or simply enjoyed doing them more than other aspects of their work.

2.Habit

Habitual behaviours are recognised as useful. There is a clear benefit to performing these types of tasks, and SME owners can easily rationalise why they are important. Habitual behaviours may take more time to form, but once a benefit is experienced or the behaviours are recognised as useful, they will become a second-nature habit eventually.

Habits are useful in SMEs when modelled by the SME owner because the behaviour can be easily replicated by other employees in the business. These often form the basis of collaborative working systems.

3.Routine

Routine behaviours were recognised as necessary and often come with regular timelines or deadlines. These are things that a SME owner must do regularly, but they do not bring emotional reassurance or have clear or tangible benefits to the entrepreneur.

Tax sits in this category, as it lacks the emotional resonance of a ritual, or the perceived rational benefits of a habit. It is complied with, not embraced. Tax lacks the ‘stickiness’ of a ritual or habit when it comes to SME owners’ behaviours.  Managing tax, like other routine behaviours, is not prioritised.

OBSERVATIONS FROM THE FIELD

Rituals - Many examples of this type of behaviour were observed, such as Brandon calling the bank every day to check his account balance and any incoming or outgoing costs, or Isla designing training where she introduced new starters to her preferred way of working such as the importance of checking Facebook groups regularly to find new clients.

Habit – An example of habitual behaviour would be Robert making use of live shared documents so that he could work with his business partner remotely.

Routine - Throughout the 17 months many examples of routine behaviours were observed, SME owners talk about these tasks as though they are a chore and tedious. For example, things like Alexa updating the insurance and health and safety policies.

Natural systems

A business’s natural system is the sum total of its infrastructure, whether digital or physical, or human, in the form of staff. One of the most prevalent long-term causes of mistakes and errors is the fundamental difference between how SMEs’ natural systems operate compared to HMRC’s. Businesses build their natural systems to satisfy an emotional need, rather than pragmatic ones. We observed business owners building their IT infrastructure, filing systems, key-performance indicators, and organisational structures in a reactive rather than proactive way. The most important systems that kept their businesses running were set up to suit a particular need at the time, rather than to satisfy the end goal of meeting tax obligations for the long-term.

A CASE STUDY ON DOING SOMETHING 3 TIMES OVER:

Alexa (20 to 50 employees) took pride in her ability to run a business smoothly. Payroll was one of the items that she had sole responsibility for and was also where Alexa’s paper and digital systems overlapped.

For Alexa, the physical printouts of commission slips, Sage reports, LOTUS spreadsheets and confirmation emails (from HMRC) all served as an indication that the task of payroll had been completed properly. The act of physically filing away such items was the last step of any task that Alexa does.

She used both Sage and LOTUS spreadsheets to track salaries and commissions. When she received a commission slip, she first updated her spreadsheets, and only when it was time to run payroll would she update Sage. This doubling-up may be a remnant of her old system meeting with newer technologies, but the spreadsheets also gave her reassurance as they served as a point of double-checking. Sage sat firmly in the routine space: it was something that needed to be done to share with HMRC, and for the task of payroll to be completed.

Participants’ natural systems were both digital and physical. Ipsos segmented these systems in the form of ‘me’ systems and ‘we’ systems: whether the system was intended for personal reassurance or collaboration.

1.Me systems

Physical systems, such as physical notebooks or filing systems and checklists, can be thought of as ‘me systems.’ These types of systems satisfy a highly personal and emotional need and often are not shared with others. These systems allow for a certain level of individualism, which is welcomed, as it aligns with the desire of the SME owner to be creative, individual, and entrepreneurial in their approach. Ultimately, me systems provide the SME owner with a sense of control and reassurance.

2.We systems

Digital systems tended to act as ‘we systems’: they allow for collaboration and sharing across the business and with other organisations. Even if the SME owner’s preference is to be the only one to access certain kinds of information, they recognise the rationale for sharing information with others in the business or other organisations.

3.They systems

Tax sits in a separate ‘they system’ – Tax and HMRC’s systems are something that SMEs must conform to rather than fit into their existing ecosystem. There are a variety of ways in which the systems can fit together, but the perceived inflexibility of the HMRC system meant that SME owners felt they were the ones who have to adapt and fit their ways of working to comply with HMRC.

OBSERVATIONS FROM THE FIELD

Linda set up her business with payroll running from mid-month to mid-month and the business financial year-end in December. This had resulted in confusion when inputting this into her accountancy software, but she soon learned how to use the software effectively. However, this was not something that she could do with the HMRC system, and it had resulted in miscommunication and ultimately fines due to her being ‘behind’ on PAYE.

3.7 Conclusion

SMEs in this research shared the different systems used within their businesses, and how they interacted with HMRC systems to varying degrees of success. SMEs had established systems and ways of working and were reluctant to change them. This was a barrier to systemic and behaviour change that could help with error-free tax returns.

For some of the SMEs in this research, there was a heavy reliance on tax professionals, accountants, and agents. This reliance on others could have resulted in a lack of oversight or intervention from the SME owner, which could mean that when problems arose, SME owners would be unable to comprehensively review the issue or resolve them easily. Some SME owners delegated tax wholly, which could result in a lack of oversight and understanding of their own tax situations.

When these SME owners came to contact HMRC, often in a moment of panic, these interactions did not feel like moments of learning for the SME owner. A cycle was observed of panic in the face of a tax issue: contacting HMRC; finding a solution; and ultimately returning to the same patterns of behaviour that resulted in the issue in the first case.

This chapter has described the nature of causes of mistakes and errors with tax. It had been observed that these failures are composed of short-term, medium-term, and long-term errors, all of which are necessary to understand and intervene in to prevent non-compliance. This chapter re-emphasises the challenges that emerge when businesses rely either too much, or not enough, on other people who can support them.

SMEs would like to see HMRC intervene more to prevent errors, such as using mistakes and errors as educational opportunities. SMEs expected clarity and specific guidance on what they could do to better prepare for their obligations, but this was not something they felt they currently got from HMRC.

Annex

The following annex includes a summary of all participants included in the research, as well as the process by which they were recruited. A brief outline of the focus of each stage of the research is given, as well as the quotas that were achieved through the recruitment.

Sample recruitment

Once an eligible shortlist of participants was established, they were asked to complete a brief audition task. This was a short, self-filmed video in which the SME owner or leader told us about their business, and outlined what their day-to-day life was like. The majority of the recruited sample were owner managers.

Ipsos received 30 such audition tasks. In collaboration with HMRC, a sample of 20 SMEs was selected based on the potential participants’ demographic details, and the extent to which they felt open and willing to share details about their lives and businesses. Once the sample of 20 was chosen, the SMEs were contacted and invited to take part. All participants, whether selected or not, were given a financial incentive for their time and effort in participating.

Attrition was an important factor for consideration due to the longitudinal nature of the research. The longer the research period, the greater the risk of attrition from changing SME owner availability and eligibility for the research. Over the period of fieldwork, four businesses withdrew from the study because of personal circumstances or because the business ceased to operate. Each open position in the sample was filled by participants who had been recruited in the original 30. This ensured Ipsos started each dip of fieldwork with a full sample of 20 businesses. Of this 30, two were recruited through contacts provided by existing participants after two withdrew from the research.

Summary of participants

Business systems

Business system	Quantity
Digital only	8
Paper only	1
Combination	15
Total	24

Operating lengths

Operating length	Quantity
Less than 1 year	3
1-5 years	7
6+ years	14
Total	24

Locations

Location	Quantity
Scotland	1
Wales	1
Northern England	11
Southern England	3
The Midlands	5
Greater London	3
Total	24

Size of businesses

Size of business	Quantity
5 to 9 employees	12
10 to 19 employees	7
20 to 49 employees	5
Total	24

Industry

Industry	Quantity
Accommodation and Food Services	5
Wholesale and Retail Trade	7
Construction	1
Professional Services	5
Other	6
Total	24

Gender

Gender	Quantity
Male	13
Female	11
Total	24

The participants in detail

The following are summaries of each of the participants and their business. All participants in this research have been given pseudonyms to ensure that searching their name online cannot identify them as an individual, and to protect their anonymity.

Participant 1, 10 to 19 employees, café

This participant opened their sandwich shop in their early 20s with their business partner and childhood friend. Having worked in the hospitality sector from school leaving age, they have in-depth knowledge of how to run such a business. They dream of selling the business for millions after developing it over the next few years.​

Participant 2, 20 to 50 employees, logistics

This participant joined the company as a finance manager in 2015. They do not have formal training and is qualified ‘through experience.’ They are known within the company as being extremely diligent and productive. They are always very busy but do not get overwhelmed. They hope to grow the business and have their own team in the future.​

Participant 3, 10 to 19 employees, social care

| This participant opened their care agency over 5 years ago – they were originally working as a carer for another agency. Their dislike for the way staff were treated at this agency was part of the motivation for creating their own. They have struggled with the administrative side and balancing work with family life but is passionate about providing good service.​

Participant 4, 20 to 50 employees, nursery

This participant has a wealth of experience in early years care. With this passion for the sector, they decided to start a group of nurseries by purchasing others. They purchased multiple nurseries within a short period of time and established a head office. Having not run a business before, they have struggled with taking on many new responsibilities.​

Participant 5, 20 to 50 employees, events management

This participant runs their events and logistics company with a group of co-directors. They are very down-to-earth, logical, and methodical. Their business operates internationally, which means they are frequently abroad. They great pleasure in pulling off events successfully and satisfying clients.​

Participant 6, 20 to 50 employees, manufacturing

This participant was hired into the business with the explicit purpose of one day taking on a leadership role. They have been a rising star within the organisation, and they see themselves as a moderniser. They studied business administration and often contrasts themselves with the “old guard” within the business. They care deeply about sustainability and love winning awards for the business around innovation, corporate social responsibility, and employee wellbeing.​

Participant 7, 10 to 19 employees, food production

This participant is unapologetically motivated by money. When we first met, they wanted to break £1 million in turnover. They had not quite got there yet, but they believe in their range of health foods, and is committed to sustainability, responsibly sourced ingredients, and treating staff well. 

Participant 8, 20 to 50 employees, retail estate

This participant has been in the business for nearly 40 years. They view themselves as a seasoned professional on all things that come with running a business, from people management to finance and tax obligations.

Participant 9, 10 to 19 employees, café

This participant has been an SME owner for nearly 20 years and is from a family of entrepreneurs. Operating over two different sites, their food and beverage company is still recovering from the impact of Covid-19.

Participant 10, 10 to 19, online retail

This participant worked in the retail space for a number of years before starting their own business a few years ago. Since then, they have realised the complexities that come with running a company, from HR to finance and accountancy.​

Participant 11, 5 to 9 employees, café

After a long career as a project manager, this participant decided to start their own food and beverage company. They loved to cook and was really excited at the prospect of having their own business. They soon realised that one of the biggest challenges was finding experienced and reliable staff at a minimum wage.

Participant 12, 5 to 9 employees, online retail

This participant started selling clothes online then rented their first premises just before lockdown. The business is now run as a shop and a website and is largely reliant on social media for attracting business. The launch of their website has been one of the proudest moments for the business.

Participant 13, 5 to 9 employees, online retail

This participant started their business as soon as they left university; before online shopping was popular. Since then, they have grown the business to multiple employees, bought their own premises, and is now launching their own brand. Brexit has been a challenge, as they had to cut back to the UK market only, but they managed to survive. They are laid-back and keep their weekends for their family. ​

Participant 14, 5 to 9 employees, hairdresser

This participant runs two hair salons. Even though they strive to work on the business and not in it, they feel that in their field, the individuals are the business in that the clients will follow their stylist. For that reason, they need to keep clients and staff happy. They are always looking to grow their clientele. Their supplier is a valued ally who will help them with their business goals and organise leadership workshops.​

Participant 15, 5 to 9 employees, real estate

| This participant set up their business with their partner. The two of them were working for another company until they felt confident that they could do it on their own. They run their team in a friendly but firm manner. They love Excel and streamlining the work with appropriate tools. They pay great attention to detail when it comes to property assessments, following up opportunities and their relationships with other professionals.

Participant 16, 5 to 9 employees, marketing

This participant’s business helps other businesses with their online presence. They set the business up five years ago after spending many years working for a business that did the same thing. They are heavily involved in the day-to-day operations, managing everything, training staff, and talking to existing and prospective clients.​

Participant 17, 5 to 9 employees, construction

This participant started their building contractor business around 10 years ago. They started the business because in his previous job there was already a director, and they knew that they could not climb the ladder. They are a hands-on boss. ​They want to be at home with their family in the evenings and wants the same for their employees. 

Participant 18, 10 to 19 employees, food import

This participant opened their first warehouse because they wanted to provide customers with high quality products. They believe that good food is linked to good health. When they opened, they did not have a real growth plan; they simply went to shops offering their products. Through trial and error, they have learned to conduct a successful business.​

Participant 19, 5 to 9 employees, pest control

This participant has been working in pest control for over 25 years. It’s an all-seasons business; they are always busy, and this participant often goes into the field with their employees. They want them to take pride in their job.

Participant 20, 5 to 9 employees, car servicing

This participant opened their business at a young age, when their father suggested that they start a business together. They want to earn as much money as possible in the next few years to be able to retire early and follow their personal interests. They love to learn and implement new systems to create a better working environment.​

Structure of the research

Dip 1 prioritised an observational and exploratory understanding of SMEs’ lives. The study deliberately avoided explicit or in-depth references to tax here, instead prioritising an observational and participant-led approach to whether the question of tax emerged spontaneously, which indeed it did.

Dip 2 placed the most emphasis on the natural systems of the business. A natural system is the sum total of human, technological, cultural, and intellectual resources that come together to facilitate the business’s operation. It includes physical and digital assets: the vast majority of the SMEs spoken to used a combination of paper-based and computer-based systems.

Dip 3 prioritised participants’ relationship with, and perceptions of, HMRC. This involved understanding how they communicate with HMRC, seeing examples of interactions, emails, and letters. In this dip, researchers began to ask explicitly what behaviours or actions the business might be willing to adopt or take to change the way they do tax, including specific prompts devised by HMRC for the purpose of stimulating discussion.

Dip 4 was summative. It aimed to validate the findings from the previous three dips and fill any gaps in understanding.
To establish the overall narrative behind each dip, thematic analysis was conducted. This was achieved by combining observations of participants into ‘codes,’ or individual units of meaning. One code, for instance, was ‘Burnout,’ drawn from multiple clips of SME owners showing us and telling us how exhausted they often were. These codes were combined into themes.