Getting small businesses ready for the digital tax era

Stuart Miller

Director, Product Compliance and Industry Engagement, Xero

Experts are warning small businesses and sole traders to begin making the transition to digital tax submissions as HMRC prepares to implement sweeping changes.

While making the digital switch may seem a daunting step for small businesses, sole traders and landlords, it is the way HMRC wants businesses to deliver their accounts going forward. Experts are urging businesses to act now as they risk fines and being left behind by their competitors.

Test tax solutions and systems

Tax expert Stuart Miller explains that Making Tax Digital for Income Tax (MTD for IT) legislation goes live from April 2026, with the first tranche impacting sole traders and landlords who have a total income exceeding £50,000. That threshold falls to £30,000 from April 2027 and £20,000 at a date yet to be confirmed.

With up to 3 million businesses affected in the next four years, Miller encourages small businesses to speak to their accountants, bookkeepers and advisors as soon as possible. “The digital transition will be daunting for businesses, especially in a tough economic climate,” he adds. “So, start now and see the next financial year as a ‘dummy run’ to test solutions and systems.”

The incoming MTD for IT regulations says all transactional data for receipts and invoices must be kept in a digital format. Small businesses must provide quarterly updates on income and outgoings to HMRC, which will then deliver a tax estimate for year-end filing of accounts.

84% of small businesses
believe digital tools have
delivered operational benefits.

Platform offers efficiency gains

Xero is a small business accounting platform, offering bookkeeping and payment solutions to over a million subscribers in the UK. Businesses impacted by MTD for IT need to be aware of their responsibilities. Miller says: “The most interesting aspect of MTD for IT is the potential efficiency gains and streamlining of processes and operational benefits these businesses get.”

Research by Xero indicates that, on average, small businesses (one to nine employees) use 4.7 digital tools, but 42% do not use finance or accounting tools at all. The report further suggests that digital-led habits will enable clear, transparent and regular reporting to support better business decisions and efficiency gains.

Easy-to-onboard digital tools

Figures additionally show that 84% of small businesses believe digital tools have delivered operational benefits, and 71% note at least one financial and communication benefit. Digital records also spread business admin across the year and deliver an opportunity for small businesses, accountants and bookkeepers to work together on tax and other advisory support, such as with growth strategies or long-term planning.

“There is no denying it will be legwork for businesses to move onto digital tools; that is why software needs to be simple to onboard,” continues Miller. “But the benefit of having real-time digital information is what should make MTD for IT a good driver for small business growth.”

Choosing the correct software

Software should be reliable, cost-effective, eradicate human error, have inbuilt prompts such as flagging up VAT thresholds, streamline processes and deliver a better understanding of cash flow. Such real-time data is also invaluable for businesses that can get a better understanding of their financial health and insights that support scenario planning. It can also help those seeking additional funding. However, businesses should research to ensure the software meets their needs.

HMRC has a web page on currently available MTD software, and Xero also has 24/7 online support. It is also the first major software vendor to pass the HMRC testing phase in June 2022. It offers software supporting non-VAT registered businesses to complete their MTD journey, streamline bank reconciliation, auto-detect transactions and scan receipts using a smartphone.

“What we really want,” says Miller, “is for those digital tools to supercharge businesses to give them real efficiency and benefits and free up time for people to do more of the things they love, rather than books and records.”