The study found that 41% of those surveyed are not prepared to comply with the new rules. Among taxpayers due to be affected in the first phase of the rollout, 28% said they are behind schedule and unsure whether they will meet the first quarterly filing deadline on 7 August, while 14% have yet to take any action.
For landlords, the findings point to a continued lack of understanding ahead of the shift to digital tax reporting. Under the new rules, sole traders and landlords with gross income above £50,000 will need to keep digital records of income and expenses, submit quarterly updates using HMRC recognised software and complete a final declaration the following January.
Xero’s research suggests that while many are taking steps to prepare, there is still a sizeable group at risk of falling behind. Overall, 58% said they are on track to comply. Some 44% have read about the changes or attended training, 42% have adopted HMRC recognised software or processes, and 41% have signed up for Making Tax Digital for Income Tax with HMRC. In addition, 40% have sought advice from an accountant or bookkeeper.
The research also found widespread uncertainty about the new requirements, with 81% saying they need more clarity on key areas of compliance.
Among the main areas of confusion are the difference between what needs to be included in quarterly submissions and the final declaration, cited by 43% of respondents. Some 41% are unclear on how fines and penalties will be applied, while 31% do not know whether the threshold is based on profit or turnover. More than a third, 37%, said they are concerned about making mistakes that could lead to penalties.
Despite this, many respondents said they could see benefits in the changes. Around 76% believe Making Tax Digital for Income Tax will reduce end of year tax surprises by improving visibility of their tax position, while 73% said it could provide more confidence over their tax obligations. Some 74% said the changes would encourage them to adopt digital processes, and 72% believe it could save time compared with completing an annual self assessment.
Kate Hayward, UK Managing Director, Xero, said: “Small businesses are already juggling an incredible amount and it’s completely understandable that these changes might feel overwhelming. However, the data shows that many are taking the right steps by seeking advice and doing research - and the good news is that there’s still time to prepare. For anyone feeling behind, start by taking small, manageable steps. For example, get set up with digital tools or speak with an accountant or bookkeeper for guidance.”
