Tanuvi Ethunandan ACA founded Data Duopoly, a provider of visitor flow management technology in October 2019. Her goal was to help tourist attractions and other popular destinations ensure people moved around their venues in the best way possible.

For a while, the outbreak of COVID-19 pandemic forced tourist attractions to close their doors to visitors. Nevertheless, Data Duopoly quickly took off and was soon working with well-known organisations including the National Trust, the Eden Project and Falmouth University. The business was able to sell its proprietary technology, allowing Ethunandan to exit.

A strong desire to solve problems is what motivated Ethunandan to leave the corporate world and become an entrepreneur. “I try to find problems and think about what can be done better,” she explains. “So, if there’s a challenge that’s impacting people in a certain way, I’ll think, ‘What can I do to help solve this?’”

VAT headaches

But while Ethunandan was solving problems for venues, VAT caused problems for her business, especially in the early days. She registered Data Duopoly for VAT soon after incorporation so that it could reclaim VAT on the purchase of laptops needed by the development team. “Being a tech company, laptops were quite important,” she says. “And when you’re a young company, getting 20% off some new MacBooks makes a big difference.” 

It was a sensible business decision to reclaim the VAT on the laptops, but challenges arose when Data Duopoly began selling to small charities and non-for-profit organisations that were not VAT-registered. “We had to add 20% onto our costs,” Ethunandan says, “which made us less cost-competitive versus other competitors.” Another issue was that sometimes these organisations wanted to use grant money to buy Data Duopoly’s services, but a stipulation of their grant was that it couldn’t be used to cover VAT. To manage these issues, the business adjusted its prices so that it effectively bore the cost of the VAT itself. 

Another challenge was posed by the grants that Data Duopoly received itself. The business was awarded a significant grant from Innovate UK, but could not use the funds to cover any VAT. To prove that it wasn’t spending the grant money on VAT, it had to share its VAT returns. So, the business had to be careful not to include VAT in the expenditure that would be reimbursed under the grant, while also reclaiming all the VAT on that expenditure from HMRC, as it was entitled to. “It was a pain, from a record-keeping point of view, to understand that we weren’t missing out on any money,” Ethunandan explains. 

Initially, Ethunandan did the company’s quarterly VAT returns herself, spending between half a day and a day on the return each time. Thanks to her accountancy training, she didn’t find the process too daunting. Nevertheless, the time spent on VAT compliance was time she could have spent improving and promoting her product and pursuing sales opportunities. Later, the business outsourced both its payroll and VAT returns to an accountancy firm. 

How to fix it – practical solutions

Ideally, Ethunandan would like VAT to be calculated in real-time when businesses record their invoices and expenditure on their accounting software. “Real-time VAT reporting would help immensely with businesses’ cash flow,” she says. She also believes that accounting software should include pop-up flags that highlight when an expense may not have been categorised according to the correct VAT rate.

Ethunandan would also change how not-for-profit organisations interact with commercial ones, so that smaller not-for-profits and charities aren’t financially penalised for buying goods and services from VAT-registered businesses. One way to do this would be to exempt them from paying VAT on any supplies they buy. 

Perhaps the greatest challenge, however, is that many SMEs are not using VAT to their advantage. Due to the £90,000 turnover threshold, Ethunandan believes that many smaller businesses think of VAT as primarily a consideration for larger businesses. They are also worried about the administrative burden. “But businesses can get 20% off their setup costs if they’re buying goods or services from other companies,” Ethunandan points out, “which makes their seed capital go a lot further. That’s 20% growth capital that the UK economy is missing out on.”

Ethunandan suggests that all SMEs could be obliged to enrol for VAT when they incorporate with Companies House. Alternatively, HMRC could encourage more SMEs to voluntarily register for VAT, even when their turnover is below the threshold, by communicating the benefits of registration. 

Overall, she’s clear that more needs to be done to fix the UK’s VAT system, so that businesses benefit from improved cash flow while the government more rapidly secures the revenues needed to deliver public services. “VAT is not where it needs to be, to be an asset to the UK economy,” Ethunandan concludes.