Research and analysis

Understanding VAT debt and how customers manage debt

Published 14 September 2023

Qualitative research with micro and small businesses to understand VAT debt behaviours.

HMRC Research Report 724.

Qualitative research conducted by Ipsos between April and June 2022.

Prepared by Ipsos (Amrita Sood, Andrew Shaw and Jamie Roberts) for HMRC.

Acknowledgements: Ipsos would like to thank businesses who participated in the research. We greatly appreciate the support of HMRC in explaining key processes and sharing their expertise throughout the project.

Disclaimer: The views in this report are the authors’ own and do not necessarily reflect those of HMRC.

Glossary and abbreviations

This report uses terminology and abbreviations that are explained below.

Term	Definition
Accountancy software	Accounting software manages and records the day-to-day financial transactions of an organisation, including fixed asset management, expense management, revenue management, accounts receivable, accounts payable, subledger accounting, and reporting and analytics.
Accountancy software	Accounting software manages and records the day-to-day financial transactions of an organisation, including fixed asset management, expense management, revenue management, accounts receivable, accounts payable, subledger accounting, and reporting and analytics.
Accountant	An accountant is someone who keeps or examines the records of money received, paid, and owed by a company or person.
Agent	An agent is someone who acts on behalf of the business, for example, an accountant or bookkeeper.
Incorporation	Incorporation is the process by which a new or existing business registers as a limited company. A company is a legal entity with a separate identity from those who own or run it. The vast majority of companies are limited liability companies, where the liability of the members is limited by shares or by guarantee.
Tax gap	The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid
VAT (Value-added Tax)	A tax that is collected at each stage in the supply chain of goods or services and borne by the final customer. The standard rate of VAT is 20% on most goods and services.
VAT returns	A VAT return is the declaration a customer submits to HMRC to advise HMRC of the customer's VAT transactions either quarterly, monthly or in some cases annually.
Business types	Four business types were identified during the analysis process. Businesses were categorised based on their attitudes and reactions towards VAT debt, rather than the amount or frequency of their debt.
‘Businesses in recovery’ (Business type)	‘Businesses in recovery’ were defined as those in debt as a result of long or short-term financial difficulties.
‘Businesses needing support’ (Business type)	‘Businesses needing support’ were defined as those in debt as a result of a lack of understanding around VAT obligations.
‘Strategic risk takers’ (Business type)	‘Strategic risk takers’ were identified as those in debt intentionally due to reinvesting money into their business or prioritising business revenue opportunities over VAT obligations.
‘Admin error’ (Business type)	‘Admin error’ businesses defined as those in debt as a result of a perceived administrative error or technical issue.

1. Executive summary

1.1 Introduction and methodology

HM Revenue and Customs (HMRC) commissioned Ipsos to undertake qualitative research with the aim of understanding VAT debt behaviours amongst micro and small businesses.

HMRC are keen to understand more about attitudes towards debt among micro and small businesses and identify opportunities and actions needed to better support this customer group.

Ipsos conducted 43 qualitative interviews between April and June 2022 with businesses either currently in VAT debt or businesses that had paid off their VAT debt in the last 24 months. The research aimed to understand:

• the ways in which businesses manage their VAT processes and payments
• the factors and behaviours driving VAT debt
• business’ experiences and attitudes towards VAT debt
• support and communication needs around VAT debt

1.2 Key findings

Four business types emerged in the analysis based on both experiences of and attitudes towards VAT debt, and motivations to repay. The business types identified were:

• ‘Businesses in recovery’ - businesses in debt as a result of wider (either longer or shorter-term) financial difficulties
• ‘Businesses needing support’ - businesses in debt driven primarily by a lack of understanding around VAT
• ‘Strategic risk takers’ - businesses in debt intentionally, due to reinvesting money into the business or finding they did not have time for VAT obligations and instead spent their time on growing their business
• ‘Admin errors’ - businesses who believed their debt was the result of an administrative or technical issue

These business types have been referred to where appropriate throughout the report.

Managing VAT obligations

Businesses used a range of processes to manage their VAT obligations. These included those who were well-versed in using accounting software. It also included others who relied heavily on their accountants or agents with little knowledge themselves of how VAT processes worked. Levels of awareness of VAT filing and payment processes also varied greatly, some businesses are adept at managing VAT processes themselves. On the other hand, others were unaware of the basics, such as the threshold for registering for VAT or the requirement for quarterly payments.

Drivers of debt

A number of factors were identified to be causing indebtedness, ranging from temporary cashflow shortages to broader financial difficulties. Businesses reported that these factors had been intensified as a result of the COVID-19 pandemic, Brexit, inflation, and the current increase in cost of living. Other drivers of debt included a lack of knowledge around VAT processes and (at least perceived) administrative or clerical errors.

Debt experiences and attitudes

Debt experiences and attitudes varied greatly for each identified business type:

‘Businesses in recovery’ were split between those who were proactive about their debt and those that were avoidant. ‘Proactive businesses in recovery’ sought to resolve their debt as soon as possible by contacting HMRC to discuss payment options, usually agreeing a payment plan for the debt. ‘Avoidant businesses in recovery’ tended to have longer-term financial problems, felt overwhelmed and avoided engaging with HMRC to resolve the problem.

‘Businesses needing support’ were often poorly advised start-ups with limited digital skills and a poor understanding of VAT. Many were highly reliant on personalised support from agents and from HMRC helpline operators.

‘Strategic risk-taking businesses’ made calculated decisions to prioritise growing their business over addressing VAT debt, and to accept any penalties that arose as a result. They were highly resistant to taking any action linked to engaging with their debt, including contacting HMRC.

‘Admin error businesses’ believe the VAT debt they are stated to owe is due to an error made either by themselves, an agent or HMRC and therefore is not due for payment. These businesses saw HMRC’s processes as unclear and frustrating when trying to resolve administrative errors.

Communication and support

Businesses stated that they may have been more encouraged to repay VAT debt if they had received personalised telephone communication instead of letters from HMRC. Letters were often perceived to be too impersonal and easy to ignore. Other communication and support needs varied depending on business type:

• ‘Businesses in recovery’ reported that they benefitted from setting up payment plans to reduce or pay off their VAT debt
• ‘Businesses needing support’ felt that they would benefit from clearer information and guidelines on VAT processes, for example, when and how much to pay
• ‘Strategic risk takers’ felt that they would benefit from direct forms of contact to ‘check in’ on their VAT payments and greater flexibility around when to file
• ‘Admin error’ businesses felt that their core need was around receiving support to resolve their issue quickly and efficiently, without the need for multiple calls to HMRC

2. Introduction

2.1 Research context

Whilst the VAT Debt element of the VAT Tax Gap is subject to uncertainty, the 2021 National Audit Office report (NAO) Managing tax debt through the pandemic highlighted that there were more VAT registered businesses in debt, and those previously in debt owed more. This research aims to provide a clearer picture of the drivers of VAT debt among businesses, as well as the types of support needed to help mitigate, or at least reduce the impact of VAT debt.

2.2 Research aims

The aim of this research was to understand behaviours, experiences and attitudes surrounding VAT debt amongst micro and small businesses.

Specifically, the research aimed to understand:

• the situation that resulted in businesses becoming indebted to HMRC
• businesses experiences of being in debt to HMRC, attitudes towards the debt and motivations to repay
• barriers and drivers to repaying HMRC debt and understanding what support HMRC can offer to encourage repayment
• how becoming indebted could be avoided and steps taken by businesses to repay HMRC debt

2.3 Methodology

The research included 43 in-depth interviews with businesses who had a current VAT debt (30 businesses) or had settled a VAT debt in the last 24 months (13 businesses). Each interview lasted around 45 minutes. Interviews were conducted via telephone or on Microsoft Teams and took place between April and June 2022.

A qualitative approach was considered the most appropriate methodology for this research due to the sensitive nature of discussing debt. It also allowed for a full exploration of the individual behaviours and experiences of a range of businesses.

The findings in this report are intended to provide insight into the behaviours and experiences of a range of businesses. By design, the research set out to capture a rich and detailed understanding of different behaviours and experiences, not to determine the prevalence of different experiences and views. Where the report indicates that ‘few’, ‘some’, or ‘many’ customers experienced or felt something, this is in relation to the research participants only. Findings cannot be considered representative of businesses with VAT debt or settled VAT debt and should not be interpreted as generalisable to these populations.

Participants were recruited by specialist recruiters using a screening document. A sample of 1,976 businesses (1,380 with a current VAT debt and 596 with a settled VAT debt) was provided by HMRC data for this research.

Quotas were set to ensure a good mix of businesses in the sample. Initial quotas were set based on business size, incorporation, size of debt, frequency of indebtedness and length of time in VAT debt. The quotas were relaxed during fieldwork due to recruitment difficulties. Despite this, a good spread across the quotas was maintained (See table 1 in the technical annex for the full breakdown of set quotas and achieved numbers).

During the analysis businesses were first categorised on the characteristics of their debt, for example amount and length of time in VAT debt. However, no clear patterns were observed so instead businesses were analysed based on their experiences, behaviours and attitudes towards debt.

2.4 How to read this report

Four business types were identified during the analysis process. The definition of each business type can be found in the glossary and these will be referred to throughout the report.

Verbatim comments have been included in this report to illustrate and highlight key points and common themes. Where verbatim quotes are used, they have been anonymised and attributed with the following characteristics:

• debt status: Cleared VAT debt, Current VAT debt
• business size: Micro, Small
• sector: Standard Industrial Classification (SIC) codes (Please see Companies House for the full list of sectors)
• business type: Business in recovery, Businesses needing support, Strategic risk taker, Admin error

3. Background to VAT debt and experiences of managing VAT payments

Chapter summary

This chapter explores the background to VAT debt, how businesses manage their finances and their reasons for being in debt.

We found a broad spread in levels of financial knowledge, confidence, and capabilities among the participating businesses. These differences had a direct bearing on how successfully businesses were able to manage and resolve their VAT obligations to HMRC. Use of agents also impacted how successful businesses were at complying with their VAT obligations.

This chapter looks at the factors that cause indebtedness, including cashflow shortages and financial difficulties. The reasons for being in debt, attitudes to debt and motivations to repay varied across the 4 different business types.

This chapter also looks into businesses’ experience of managing the financial elements of running their company, including VAT payments.

We found that:

‘Businesses in recovery’ were in debt due to financial difficulties and were more likely to focus on keeping their business going than on their VAT obligations.

For ‘businesses needing support’, debt resulted from a lack of knowledge or understanding of specific VAT obligations, eligibility, or processes more generally.

‘Strategic risk takers’ prioritised generating revenue for the business over VAT obligations.

‘Administrative error businesses’ perceived their VAT debt was as a result of an administrative issue, miscommunication or technical issue.

We found a broad spread in levels of financial knowledge among the participating businesses. These differences had a direct bearing on how successfully businesses were able to manage and resolve their VAT obligations to HMRC. Use of agents also impacted how successful businesses were at completing VAT obligations correctly.

3.1 Overview of business types

During the analysis, businesses were categorised into 4 business types based on their attitudes and reactions towards debt. The first type, ‘businesses in recovery’, made up the biggest proportion of businesses interviewed, followed by ‘businesses needing support’ which made up a medium sized proportion of the sample. The final 2 types, ‘strategic risk takers’ and ‘admin errors’, made up smaller proportions of businesses interviewed, but are reported on due to their specific needs. Full definitions of each business type can be found in the glossary.

3.2 Businesses in recovery

Managing finances and VAT payments

Of all the groups, ‘businesses in recovery’ had the most sophisticated processes in place for managing their finances. They had a good knowledge of how VAT payments were made. They used accountants, bookkeepers or accounting software, sometimes in combination, to manage their finances.

They were also the most aware of when they needed to file their VAT returns. Some made use of features in accounting software to remind them when they needed to do so. Others relied on their agents to file returns on their behalf, and to inform them of the amount owed each quarter.

These processes largely worked, and the ‘businesses in recovery’ we spoke to tended to be happy with the service their agents were providing them. Some businesses even attributed their lack of late VAT payments to the fact that they had hired an agent.

“I have a good understanding…it's really self-explanatory…in my past employment, I was part of 3 VAT inspections, and I really learnt a lot being part of that.”

(Current VAT debt, Small, Professional activities, Business in recovery)

Drivers of debt

For ‘Businesses in recovery’ debt was not the result of a lack of processes in place to manage finances but instead a result of financial difficulties. Examples of these include experiencing reduced income, cash flow issues, or adverse circumstances. In some cases, cash flow issues were the result of customers or clients not paying on time which then resulted in the businesses not being able to pay their VAT return on time. Some adverse circumstances included personal issues such as going through a divorce resulting in customers feeling that making VAT payments was not a priority at that time.

For these businesses the COVID-19 pandemic either led to or contributed to their inability to meet their VAT obligations and wider financial difficulties. COVID-19 impacted these businesses in a number of ways:

• could no longer trade during lockdowns
• clients or customers failing to pay on time
• loss of customer base as they could no longer pay for goods or services the business offered

“We were really struck by the pandemic; we were not allowed on our clients premises. We could no longer trade. We stopped completely.”

(Current VAT Debt, Small, Administration, Business in recovery)

3.3 Businesses needing support

Managing finances and VAT payments

The lack of knowledge about VAT displayed by this group was a major factor in them falling into debt to HMRC. Areas of low knowledge included VAT obligations, liabilities, and processes. These businesses were often heavily dependent on their accountants or agents and had little awareness of how to go about filing returns digitally themselves. This therefore meant that their lack of knowledge, sometimes compounded by their accountants or agents lack of VAT expertise, resulted in businesses becoming indebted.

Some ‘businesses needing support’ were unaware of their obligations based on VAT thresholds, for example, some registered for VAT despite being under the £85,000 threshold. This then led to those businesses having paperwork to deal with that would not have been necessary had they not registered. Other businesses failed to register despite being above the threshold, thus incurring debt to HMRC.

“Honestly, I did not have a clue that we had to be VAT registered…. we did not know how to run a pub when we first started, that is why we got the accountant, so expected him to tell us what to do.”

(Current VAT debt, Small, Accommodation and food service activities, Businesses needing support)

Drivers of debt

For businesses that had a lack of understanding of VAT, this was the main factor that led to them being in VAT debt. As outlined above, ‘businesses needing support’ were often unclear of their VAT obligations once registered. For example, some in this category were unclear that only businesses with a turnover over £85,000 are required to register for VAT. Or, once registered, they were unaware of when to file VAT returns. Examples include:

1. A few businesses had registered for VAT despite being under the £85,000 threshold and had not realised that once registered they would have to submit VAT returns even though their income was below the threshold.

2. Other businesses trading above the threshold had failed to register, thus incurring debt across a number of years to HMRC.

3. One or two VAT registered businesses were unaware of their VAT obligations once registered, for example, that VAT payments needed to be made quarterly rather than annually. One business missed several quarterly payments before their agent alerted them to the issue, and they subsequently paid off their debt.

These businesses were heavily dependent on their accountants or agents and had little awareness of how to go about filing returns digitally themselves.

3.4 Strategic risk taking

Managing finances and VAT payments

‘Strategic risk takers’ were often entrepreneurial and energetic when it came to building their business. However, they had a lack of processes in place to manage finances because time spent on admin was seen as taking away from time to grow their business. VAT returns are an example of a task that they found excessively time-consuming and which they chose to de-prioritise, leading them to make the judgement that paying the penalty for a late payment was worth it. These businesses were willing to pay penalties at a later date if they could prioritise increasing profits for their business in the short term.

“In the last 2 years, I have more work than ever…I already know that I am late with the most recent one (VAT payment)…I’m not going to turn down work to do it. I would rather be late and pay the fine and interest.”

(Cleared VAT debt, Small, Professional activities, Strategic risk taker)

Drivers of debt

‘Strategic risk takers’ differed from other businesses in that failing to meet VAT obligations was seen as a strategic business decision. They prioritised investing time and money in their business to generate revenue rather than declaring and paying VAT. This was viewed as part of a strategy to enable cash flow to facilitate other parts of the business, to focus on generating revenue, or to finance the funding of new businesses. ‘Strategic risk takers’ had funds available to pay VAT but made the conscious decision to re-invest instead of making VAT payments.

Like other businesses in the sample, ‘strategic risk takers’ were impacted by the COVID-19 pandemic. These businesses had struggled to work during the pandemic, but many were now facing an influx in work as a result. These businesses therefore prioritised spending their time and money on new work rather than VAT obligations.

Due to the increase in workload, these businesses felt they did not have the time to spend on administrative obligations, completing VAT returns was seen as a time-consuming task. They therefore failed to file their VAT returns or to make VAT payments on time, leading to debt.

There was also an expectation that HMRC would show lenience on late payments in the aftermath of the pandemic.

“VAT was a low priority at the time because we were shifting online as a business and I guess we also knew that lots of companies would be in the same boat and HMRC would probably be a bit lenient, given the circumstances.”

(Cleared VAT Debt, Small, Education, Strategic risk taker)

3.5 Admin error

Managing finances and VAT payments

‘Admin error’ businesses typically had processes in place to manage their VAT, whether that be agents or accountancy software. However, their understanding of VAT obligations or understanding of the processes was often superficial. They were often dependent on their agents to let them know when and how much to pay. Having only surface-level knowledge meant that when they found they owed VAT, they were unsure how to go about resolving the issue with HMRC. Some believed that their agent had been the source of the error resulting in them being in debt, although they were unable to confirm this.

“My knowledge of VAT payments is very limited. I just know that the current rate is 20%…Certain products are exempt in this industry. Not that we do a lot of them. But again, that is always double checked by the accountant.”

(Current VAT debt, Small, Manufacturing, Admin error)

Drivers of debt

Some businesses had experienced what they considered to be an administrative issue, miscommunication or technical issue that had resulted in their VAT ‘debt’. For these businesses it was usually a one-off payment issue that had spiralled into debt due to a lack of support or miscommunication. Some examples of the issues that these businesses faced included:

• business failed and was closed, respondent failed to file £0 return and found it difficult to contact HMRC during the pandemic and so the debt increased
• direct debit payment not received due to a change in HMRC system
• unable to make payment using digital system after cancelling their direct debit during the pandemic under the VAT deferral scheme

“We could not access HMRCs digital system. I don't know what it's called, but HMRCs digital system…You can press the buttons, they were there, but they didn’t work. So, we couldn’t register. Therefore, we couldn’t make payments. And we couldn’t pay any other way… I’ve got money in my account, but the system won’t let me pay.”

(Current VAT debt, Small, Professional activities, Admin error)

4. HMRC communication and support

Chapter summary

This chapter explores the preferences for communication and support from HMRC of the 4 different types of businesses.

There was significant consistency across all 4 groups. All wanted to see more personalised and proactive engagement from HMRC. They wanted HMRC to reach out by phone or email when a VAT issue first arose, rather than be sent what were seen as generic letters. Those reporting positive experiences with their contact with HMRC had generally been able to reach its advisors quickly and had found them understanding, knowledgeable and helpful.

Those who had negative experiences complained of long waiting times on the phone. They complained HMRC staff did not know about their case and were unwilling to take ownership, and felt there was a lack of continuity in the support offered.

Beyond this, there were some additional needs specific to each group. Flexible financial support and extended payment plans were particularly important to ‘businesses in recovery’. ‘Businesses needing support’ would benefit from ‘back to basics’ information on how VAT works. ‘Strategic risk takers’ needed more regular check-ins to encourage them to attach a higher priority to their VAT debt. The needs of ‘admin error’ businesses were less in need for support, and more in need of evidence that their issue was being addressed swiftly and efficiently by HMRC.

4.1 Overview of support from and communication with HMRC

A range of positive and negative experiences were reported across all business types when dealing with HMRC about their VAT debt. Typically, the first step for all groups was to try and call HMRC, whether it be to clarify the issue or to seek resolution (for example, to pay off or reduce the debt).

More positive experiences were typified by being able to reach resolution promptly within the first couple of contact attempts and in a straightforward and efficient manner.

Notably, those satisfied with their experience of contacting HMRC said they were easily able to reach helpline advisors and found them understanding, knowledgeable and helpful. These businesses often said they found it easy to set up manageable payment plans with HMRC. This was particularly the case for some whose debts were a one-off, or a result of short-term cash flow issues.

“I spoke with HMRC and set up a payment plan with them, they allowed us to set up a payment plan with them split over 3 payments.”

(Cleared VAT debt, Small, Construction, Business in recovery)

In contrast, those with negative experiences typically felt they had to make significant effort to contact HMRC. For example, this was because they needed to make several attempts to make contact, or because they experienced long wait times. They sometimes complained of restricted opening hours and a lack of a dedicated VAT help line. This all fed into a perception of HMRC as faceless and unapproachable.

This group also often expressed dissatisfaction with their interactions with HMRC when they did get through to an advisor. For example, they reported unknowledgeable staff, a lack of ownership or understanding, or insufficient effort to resolve the problem. Those who had to contact the HMRC helpline multiple times sometimes complained of a lack of ‘joined-up’ communication between departments. These businesses reported having to start from scratch explaining their situation each time.

Beyond this, other specific criticisms were made of communications from HMRC. Some said that HMRC communications lacked personalisation and explanation. In particular, letters could feel automated and as a result were easier to ignore or dismiss. Indeed, some letters and online account notifications might be overlooked altogether or even left unopened.

“I respond much better to phone calls than letters or email….it would have been great if someone from HMRC had called and understood where I was coming from… you know the personal touch…rather than just sending these fine letters.”

(Current VAT debt, Micro, Retail, Business in recovery)

4.2 Businesses in recovery

For this group, preferences for communication and support from HMRC centred more around direct contact and financial support.

This group were primarily looking to HMRC for support to mitigate and minimise the impact of their debt, and to set up a repayment plan that was manageable for them. Notably, early interventions and proactive contact from HMRC were often valued by this group. For example, in the form of advice, guidance, and options for them to consider, rather than penalty notices. Their preference was for more direct communication. They preferred personalised emails or phone calls rather than generic letters, to allow them to talk through their individual business circumstances and needs. Where government support for small businesses struggling with VAT could be signposted in these communications, that would also be valued.

They had a particular need for extended repayment plans to allow them to manage their debt to HMRC alongside their other financial challenges.

For those ‘avoidant businesses in recovery’ in longer-term debt, greater transparency around their total accumulating debt, rather than just the current quarter, was also desired. This group would have also benefitted from more information about their options when they found out they were in debt, for example the option to set up a payment plan.

4.3 Businesses needing support

This group’s clear preference was for ‘back to basics’ advice and guidance from HMRC. This was particularly critical for new and inexperienced start-ups. One potentially valuable tool could be an ‘introduction on how to pay VAT’ starter pack sent to businesses when they first register.

This group may also have poor digital skills so guidance on how to make VAT payments online would also be valued.

They also valued proactive direct communication, in the form of an email or call from HMRC, if an error or other VAT non-payment issue was identified. Overall, there were low levels of financial literacy of this group and sometimes limited access to high-quality advice from agents and intermediaries. This meant that their need for dedicated contact lines and consistent points of contact with HMRC was heightened.

“There’s no empathy, it’s an automated letter – you just want someone to pick up the phone… you need a personal touch, the fact that everything’s gone digital is making tax cold.”

(Cleared VAT debt, Small, Retail, Business needing support)

4.4 Strategic risk taking

This group are outliers in terms of their requirements from HMRC. They often have little perceived need for support as the indebtedness of this group was more of a conscious and calculated decision.

Consequently, from the research, Ipsos believe the priority here may be around actions that HMRC can take to encourage those in this group to increase the levels of importance and priority given to VAT debt (for example, in the form of direct engagement, regular VAT ‘check-ins’ or ‘reviews’ to ensure it stays top of mind).

Beyond this, there were some calls for greater flexibility around VAT filing, for example, allowing annual, rather than quarterly, returns.

“I think regular reviews, perhaps a telephone conversation every quarter because it's scheduled then and I think communication can sometimes be very one-sided with HMRC, so it just opens up dialogue and it is much friendlier.”

(Cleared VAT debt, Small, Education, Strategic risk-taker)

4.5 Admin error

The primary need expressed by this group was for acknowledgement and recognition of the error or issue they were facing.

As with the other groups, they expressed a need for more personal and tailored engagement, and more empathetic call handling. The issues this group experienced may be highly individualised, complex, or time-consuming to resolve. Progress on providing this more tailored support may address another area of expectation: that of a minimal amount of customer effort and a reduced number of calls to resolve their issue. They expect that once HMRC has been alerted to the error, the problem will be resolved quickly without the need for them to get in contact again and re-explain their issue.

The primary need is for a more efficient resolution of the issue in question by HMRC, rather than ‘support’, as with some other groups.

“It would be good to get some clarification on where our case is, but we just have to wait.”

(Cleared VAT debt, Small, Construction, Admin error)

Annex A: Business type case studies

Businesses in recovery

The business was a construction business, with a small team of permanent staff with a number of contractors. The COVID-19 pandemic negatively impacted their business as initially all contracts stopped. Work opportunities have improved since restrictions have eased but cost of materials have increased. They used an agent that processes VAT returns digitally on their behalf. The agent used a programme to keep track of VAT payments.

Loss of income in the pandemic was the main reason for their VAT debt as they lost a lot of work during lockdowns. The pandemic also had a negative impact on their clients which resulted in clients missing payments and therefore they couldn’t collect the VAT on those payments. When the business realised that they couldn’t pay they contacted HMRC and agreed a payment plan which they paid off at the beginning of 2022.

The business would have benefitted from financial support from HMRC. When they called to set up a payment plan they would have appreciated financial help – guidance on how the business could manage finances. Specifically help that is targeted at small businesses that have struggled during the pandemic.

“This was a one-off VAT payment that I missed in 2020 and I’ve since agreed a payment plan with HMRC and paid off VAT debt at the start of 2022.”

(Cleared VAT debt, Small, Construction, Business in recovery)

Businesses needing support

The business was a not-for-profit organisation, providing services for vulnerable people in local communities. The business was reliant on funding and grants. The financial health of the business was good and sustainable, the pandemic had a positive impact on their business as there was a need for their services, so they received funding from the Youth Offending Team to support vulnerable young people during the pandemic.

When the respondent first registered for VAT they had a lack of knowledge of tax, they weren’t clear on the threshold for VAT and believed VAT was paid annually not quarterly. This resulted in VAT debt as they missed the quarterly payment deadline. The respondent was surprised to receive a letter from HMRC, they were concerned about the impact this could have on the reputation of the business. They contacted HMRC but had challenges getting through to speak to the correct person, finally spoke to the correct person and agreed to pay the VAT immediately. Recently found out they are below the threshold and do not need to register for VAT.

This business would have benefitted from guidance on paying tax when they first started their business, for example information on who should pay VAT and when. The respondent would prefer email communication as this would have meant they could have resolved the issue quicker.

“When I got the letter, I thought OMG, I first called my accountant and he told me to call HMRC… I really did not want to be in debt, especially as it’s a funded organisation for the local community. It’s the communities’ money.”

(Cleared VAT debt, Small, Professional activities, Business needing support)

Strategic risk-takers

A professional services company set up 14 years ago, working all over the UK and Europe. No permanent staff but instead hired freelancers locally. Had no work during the pandemic but as a result is currently busier than ever and struggled to find the time for admin tasks such as VAT returns and corporation tax. Used an agent to help with finances, they had tried to use accounting software but had the perception that it was a very time-consuming task.

This business had poor financial management that had resulted in a cycle of falling into VAT debt as they believed they didn’t have the time to do the admin involved. They had made the strategic decision to focus on their business and pay the penalties at a later date when business was quieter and they had the time to complete VAT returns. They regularly received letters from HMRC about late payments, but these had no impact as they were aware of the debt but would submit returns and pay when they had the time.

Would prefer if VAT could be paid annually as they find quarterly filing time consuming and burdensome. This business may also benefit from the process being made more streamlined and support around how they could reduce the time spent on VAT returns.

“I just accept these fines as an extra tax. I haven’t got time for VAT, when I am on tour for a month or quoting on 100k jobs, I am not going to turn down work to get my VAT or corporation tax done.”

(Cleared VAT debt, Small, Professional activities, Strategic risk taker)

Admin error

Professional services business, working with big corporations as clients, had been operating since 2004. Lost work as a result of the pandemic due to most business being conducted face to face. Since the pandemic, began to work virtually too. Pre-pandemic, they had no issues filing VAT returns, used an accountant and accounting software, paying VAT via direct debit.

During the pandemic the business cancelled the direct debit due to HMRC allowing payments to be deferred. Currently in the process of trying to pay the VAT owed but has found that due to HMRC’s new systems, they were experiencing difficulties making the payment manually or by Direct Debit, even though they had the funds to clear their VAT debt. They had received multiple threatening letters as a result of being seemingly unable to make payment and had struggled to get hold of HMRC due to long wait times.

This business would benefit from support from HMRC to resolve their issue. They wanted HMRC to improve their means of communication as they had found HMRC letters threatening and unhelpful. They were frustrated at the difficulties in speaking to someone that could help resolve the issue.

“I wish I could go there and speak to a person. The complete lack of transparency, the lack of accountability, but the ability the power that they have, over people, is just totally unjust.”

(Current VAT debt, Small, Professional activities, Admin error)

Annex B: Technical note

Recruitment

Recruitment took place between 25 March and 27 May 2022. The originally planned timescale was extended due to challenges with the recruitment of participants. Recruiters encountered high levels of unanswered calls, unobtainable numbers, and ineligible businesses in the sample (the full breakdown of the call outcomes can be found in table 3). Recruiters also experienced high level of refusals, the most common reasons were not having time to take part and not wanting to discuss their VAT debt. In addition, there was a higher-than-normal level of non-attendance at booked interviews when compared to other HMRC qualitative projects.

A range of strategies were used to overcome recruitment challenges, for example, quotas were relaxed (see table 1 for set quotas versus achieved numbers) and the recruitment period was extended. The other strategies used included applying increased recruitment resources, flexible interview times and appointment reminders.

A personal incentive was not offered during recruitment, due to concerns around providing payment to those indebted to HMRC. Those who chose to participate despite the lack of an incentive may therefore have been more likely to have been motivated to participate by other factors, such as a desire to make HMRC aware of their concerns.

Analysis

All interviews were audio recorded, listened back to and interview notes written up. Group analysis sessions were then held mid-way through the fieldwork period and following completion of all interviews in order to determine key themes, compare and contrast behaviours and experiences and to identify the factors driving these.

Businesses were first categorised by the characteristics of their debt (for example amount and length of debt). However, during analysis no clear patterns were observed so instead businesses were analysed based on their experiences and attitudes towards debt which were identified as being more influential factors affecting behaviours and outcomes.

Table 1: Quotas and achieved numbers

Primary characteristic	Secondary characteristic	Quota Currently indebted	Achieved Currently indebted	Quota Previously indebted	Achieved Previously indebted
Business size	Micro-businesses	Min 15	14	Min 6	2
Business size	Small businesses	Min 15	16	Min 6	11
Incorporation	Unincorporated	Min 5	11	Min 4	0
Incorporation	Incorporated	Min 5	19	Min 4	13
Size of VAT debt	Higher-level (more than £20,000)	Min 8	8	Min 3	1
Size of VAT debt	Mid-level (£5,000-£20,000)	Min 8	14	Min 3	8
Size of VAT debt	Lower-level (less than £5,000)	Min 8	8	Min 3	4
Frequency of indebtedness	One episode	Min 5	7	Min 2	10
Frequency of indebtedness	More than one episode	Min 5	23	Min 2	3
Length of VAT debt	More than 24 months	Min 8	11	Min 5	5
Length of VAT debt	24 months or less	Min 8	19	Min 5	8

Table 2: Sector achieved numbers

The sectors listed are based on the Standard Industrial Classification (SIC) codes. The full list and descriptions can be found at Companies House.

Sectors	Current VAT debt	Cleared VAT debt	Grand total
Accommodation and food service activities	3	3	6
Administrative and support service activities	2	0	2
Arts, entertainment and recreation	3	1	4
Construction	7	2	9
Education	1	1	2
Information and communication	4	0	4
Manufacturing	0	1	1
Professional, scientific and technical activities	6	1	7
Activities of households as employers	2	0	2
Wholesale and retail trade	0	1	1
Transportation and storage	2	3	5

Table 3: Number of business typologies identified/interviewed

Typology	Number of businesses identified/interviewed
‘Business in recovery’	17
‘Business needing support’	12
‘Strategic risk taker’	7
‘Admin error’	7

Table 4: Call outcomes

Call outcome	Call attempt 1 (all sample)	Call attempt 2 (all live sample)	Call attempt 3 (all live sample)	Call attempt 4 (No answer, VM, call-backs and Unavailable only)	Call attempt 5 (No answer, VM, call-backs and Unavailable only)
No Answer	416	196	159	133	93
Number unobtainable/ Line disconnected	279	12	8	0	0
Voicemail / with or without message left	246	160	68	59	26
Refusal- Not interested	172	73	25	31	12
Wrong number	179	76	14	0	0
Refusal – No reason given	221	92	28	14	44
Screen out – Not trading anymore	90	29	6	0	0
Refusal – Busy	225	83	23	17	9
Screen out – Not VAT registered	49	17	3	0	0
Not available – abroad	11	9	0	0	0
Call-backs	56	54	61	21	19
Total	1944	801	395	275	203