New research has estimated that 39% of the UK’s small businesses do not understand the next stage of Making Tax Digital.

Income Tax Self Assessment is the next phase of the government’s flagship plans to digitise tax for businesses.

More than 1 in 10 have never even heard of MTD, despite it being a legal requirement within two years, according to the survey conducted by cloud accounting firm FreeAgent.

The legislative changes, which will be introduced in 2024, will change the way millions of business owners and landlords report their earnings to HMRC. 

The first phase, introduced in 2019 and due to be expanded in 2022, was MTD for VAT. This requires VAT-registered businesses to keep digital records and use software to file their VAT submissions.

Just 6.5% of SMEs polled said they were confident that they understood how the next stage of MTD would affect them.  

Many SMEs have also highlighted a lack of clarity about MTD as the reason for their uncertainty, with more than two thirds saying that the government had not provided enough information about the legislation and the effect it will have on small businesses over the coming years. Just 1 in 10 said that they thought that the government had done enough to explain MTD.

The survey also revealed a general dissatisfaction with how SMEs are currently taxed in the UK, with the overwhelming majority (79.5%) of respondents saying that they thought the tax system should be simplified further in order to help small businesses. 

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In addition, it found that many are unhappy with the way that annual tax reporting is currently structured, with less than one in five (19.7%) saying that they wanted the tax year end to remain as April 5th. Others said they hoped that the Office of Tax Simplification would recommend changing the tax year end to March 31st (favoured by 28.7% of respondents) or December 31st (the choice of another 28.7%) instead.  

Roan Lavery, CEO and co-founder of FreeAgent, said: “Making Tax Digital represents the biggest overhaul to the UK’s tax system in more than a generation, but it’s clear that there’s still a lot of work to be done to get small businesses up to speed.


“This year, more businesses are coming under the umbrella of MTD for VAT, while millions more will be impacted by the arrival of MTD for ITSA in 2024. These are hugely important changes to the way that businesses will need to keep their financial records and file their tax returns, but there are still a significant number of people that have never even heard of MTD, let alone understand how it will affect them. 

“It’s therefore vital for the government – alongside business advisors, accountants and software providers – to pick up the pace and make sure small business owners are given all of the information they need to be fully aware and confident about MTD in the months and years ahead.”