Digital tax shake-up hits small firms, MTD for IT is a mindset shift, not just more admin

Making Tax Digital for Income Tax (MTD for IT) introduces new complexity to bookkeeping processes that many of the UK’s smallest firms aren’t used to.

Around 780,000 businesses earning over £50,000 will shift to quarterly reporting, keeping digital records and submitting returns using compatible software.

And with the threshold set to fall to £20,000 by April 2028, the digital tax transition is fast becoming unavoidable.

But for small business owners already wearing so many hats, evolving tax rules and regulations might be overwhelming. That uncertainty can lead to misunderstandings around tax alongside other important financial decisions.

Our research reveals that 28% of those set to be affected in the first phase of the roll-out are behind schedule and unsure if they will meet the first quarterly filing deadline on 7 August.

The root of the issue is a lack of clarity about what’s actually required. It’s positive to see that 44% have read up on the changes, and 42% have adopted software or processes that are HMRC recognised.

However, 81% said better guidance was needed on key areas of compliance, with this knowledge gap feeding anxieties about making mistakes.

There’s also a broader challenge at play: a mismatch between how small businesses are now expected to operate and the level of financial confidence and capability they believe they have.

Many sole traders and landlords approach financial management reactively, perhaps facing end-of-year “tax surprises” rather than having a continuous view of their finances.

MTD for IT turns that expectation on its head. Digital record-keeping will require business owners to engage more regularly and more directly with their financial data.

The good news is there’s still time to turn this into a genuine opportunity for growth. And businesses can see this, with three quarters believing MTD for IT will help reduce those “tax surprises” by giving them better visibility of their tax position (76%).

Taking small, manageable steps like talking to an accountant or bookkeeper for advice and getting started with HMRC-recognised digital tools will build stronger financial habits. Small business owners should feel confident asking for help.

Digital bookkeeping might feel like a burden, which is completely understandable when small businesses are juggling so much already.

But with the right support, adopting simple digital bookkeeping habits can provide a clearer view of a business’s financial position, enabling more informed decisions while making year-end tax returns much easier to manage.

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Kate Hayward is the UK MD of Xero

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