UK businesses warn of financial strain ahead of digital tax rules
A majority of UK small business owners are concerned about the financial and operational pressures of HMRC’s upcoming ‘making tax digital‘ (MTD) reforms to income tax.
MTD for income tax, set to take effect from April 2026, will require self-employed individuals and landlords earnings over £50,000 to maintain digital records and submit quarterly updates using compatible software.
Just one year ahead of the roll-out, accountancy software firm Free Agent found that 10 per cent of small business owners are unaware of the rules, and more than one in five (21 per cent) do not fully understand what’s required.
Nearly a third expressed concern about the financial burden of compliance, including software costs and operational changes.
“Making tax digital is the biggest change for UK tax in more than one generation, but we know many small businesses are still apprehensive”, said Roan Lavery, chief executive of FreeAgent.
HMRC’s Craig Ogilvie, director of MTD, welcomed the initiative and urged businesses to join the pilot early.
He said: “Signing up now means they can get familiar with the new system and benefit from additional support”, he said.
Yet, industry bodies warn that awareness campaigns alone may not be enough.
Industry reactions
Tina McKenzie, policy chair of the Federation of Small Businesses (FSB), said a “sizeable minority” of firms remain unprepared, with only one in seven feeling “very prepared” for the changes.
“Many small firms still rely on paper records or handwritten logs. These businesses will need to overhaul their processes, and the government must ensure they’re not left behind”, she said.
She also warned that accounting software costs could rise as more firms are required to subscribe, calling for potential regulation if providers take advantage of the situation.
Research by the FSB shows tax compliance already costs UK small businesses an average £4,500 a year, with expenses rising 10 per cent since 2021.
That figure will only climb further without government intervention or software market safeguards.
The backdrop of MTD implementation coincides with broader economic headwinds for UK SMEs, including new US trade tariffs impacting British manufacturers and logistics firms combined with tax and cost increases.
A separate HBSC UK survey shows three quarters of large UK firms are bracing for financial impacts from planned American import duties, with many slowing investment – in a blow for the government’s productivity and growth ambitions.
Still, advocates of MTD argue the digitisation of tax reporting will ultimately streamline operations and improve compliance.
Julie Falchevska, director at Maslins Accountancy, which participated in the FreeAgent project, said: “We’re helping clients prepare by showing how collaborative and accessible the process can be”.
Overall, costs for the scheme were thought to amount to £222m, back in 2016, but are now expected to hit £1.3bn – a 400 per cent increase – just to cover VAT and self assessment – according to a report by the influential Public Accounts Committee (PAC) group of MPs.
Due to “HMRC’s poor track record of repeated delays” and “widespread and repeated failures,” MPs have “little confidence” it will hit deadlines for the scheme, the report stated.