More than two in five UK small businesses, sole traders and landlords are not ready to comply with new digital tax reporting requirements, according to research from Xero.

The study found that 41% of those surveyed were unprepared for the introduction of Making Tax Digital for Income Tax, with 28% of those due to be affected in the first phase behind schedule and unsure whether they will meet the first quarterly filing deadline on 7 August. A further 14% said they had not yet taken any action.

Despite this, a majority of respondents reported progress towards compliance. Around 58% said they were on track, with many having begun preparatory steps. Some 44% had researched the changes or undertaken training, 42% had adopted HMRC-recognised software or processes, and 41% had registered with HM Revenue & Customs. Two in five had also sought advice from accountants or bookkeepers.

Kate Hayward, UK managing director at Xero, said the transition could feel challenging for smaller firms. “Small businesses are already juggling a great deal, so it is understandable these changes may feel overwhelming,” she said. “However, many are taking the right steps, and there is still time to prepare.”

Uncertainty remains widespread, with 81% of respondents saying they need greater clarity on compliance requirements. Under the new rules, sole traders and landlords earning more than £50,000 must maintain digital records, submit quarterly updates using approved software and complete an annual final declaration.

Areas of confusion include the distinction between quarterly submissions and final returns, cited by 43% of respondents, how penalties will be applied (41%) and whether thresholds are based on profit or turnover (31%). More than a third said they were concerned about making errors that could lead to fines.

Nonetheless, many respondents recognised potential long-term benefits. Around 76% said the changes could reduce unexpected tax bills by improving visibility, while 73% believed they would provide greater peace of mind. Nearly three-quarters said the reforms would encourage wider adoption of digital processes.

Advisers said businesses should begin by registering with HMRC, selecting compatible software and establishing consistent digital record-keeping practices. Seeking professional advice was also recommended to help navigate the transition and reduce the risk of errors.