2 in 5 SMEs unprepared for Making Tax Digital as first filing deadline approaches

More than two in five small businesses, sole traders and landlords are unprepared for Making Tax Digital (MTD), according to research from Xero. 

From this April, landlords and sole traders earning over £50,000 are now required to submit quarterly updates to HMRC, with the first filing due in August. 

Xero found that 41% of those affected are not yet ready: 28% are behind schedule and unsure they will meet the first quarterly filing deadline, while 14% have yet to take any action. Taken together, these numbers show that a significant proportion of small businesses, sole traders, and landlords still need to put systems in place to comply with the new requirements.

A lack of clarity remains one of the biggest obstacles, with more than four in five (81%) saying they need guidance on key aspects of MTD compliance. Common areas of confusion include what should be included in quarterly submissions versus the final declaration, how penalties will be applied, and whether thresholds are based on profit or turnover. Over a third (37%) of respondents said they were worried about making mistakes that could result in fines.

This highlights a broader challenge for SMEs: quarterly reporting is a new rhythm for many businesses, and without clear guidance or reliable systems, the process can feel daunting.

From annual admin to real-time finance

MTD doesn’t just change how often businesses file; it changes how they manage money day to day. Instead of a once-a-year process, income and expenses now need to be recorded continuously.

Research from Monzo has found that UK SMEs collectively spend close to £5 billion annually on tax and accounting software, demonstrating that digital tools are becoming essential operational infrastructure, not optional extras.

Yet, despite such investment, many SMEs, sole traders, and landlords still have work to do to get fully up to speed. Setting up effective workflows, linking software with business bank accounts, and embedding quarterly reporting routines remain barriers for a large proportion of businesses. 

Spending on software alone isn’t enough to ensure compliance. In practice, integrating accounting software with business bank accounts can make a real difference. 

Integrated accounting software can help businesses:

• Track income and expenses in real time

• Reduce manual data entry and errors

• Set aside money for tax automatically

• Stay on top of quarterly deadlines

And these benefits go beyond compliance. Better visibility over cash flow can help business owners plan budgets more accurately, identify discrepancies early, and make more informed financial decisions.

Time to get organised

For SMEs, landlords, and sole traders who haven’t yet acted, there’s still time to prepare. Starting with small, manageable steps, such as choosing HMRC-recognised software, linking business bank accounts to accounting tools, or seeking advice from an accountant or bookkeeper, can make the transition more manageable and less daunting.

Encouragingly, Xero’s research shows that many businesses either have already taken some form of action, or are likely to do so in the near future. 44% have read up about the changes or attended training, 42% have adopted new software or processes, and 41% have registered for MTD with HMRC.

The key thing for small business owners to recognise is that Making Tax Digital doesn’t have to be a compliance headache. With the right combination of tools, systems, and routines, quarterly reporting can become a way to gain better control over finances, reduce stress, and plan ahead with confidence.

The biggest obstacle is simply getting started.