It may not grab the headlines like other issues, but financial reporting and managing tax compliance are essential to business health. However, such activity comes at a cost. How can small firms afford the investment?

According to a new report from the Federation of Small Businesses (FSB), small firms spend an average of £4,500 and 44 hours a year on tax compliance. This works out at an annual bill of £25 billion for the sector. Given the current climate, it is unsurprising that the FSB wants to reduce this burden.

Furthermore, the pressure on small businesses is not only financial – it is also revealed in the Taking a Toll: Small business and the cost of tax compliance study that three in five small firm owners have suffered an increase in personal stress as a result of dealing with HMRC. Over half of businesses said that HMRC is difficult to contact.

With regard to financial reporting, while the process is less complicated for smaller firms, it is an important activity, and ensuring a high level of competency in relation to key statements (such as the balance sheet, cashflow statement and profit and less statement) offers valuable insights that can both protect and help develop a business.

Notably, the importance of financial reporting and tax compliance in the spotlight thanks to the development of the Making Tax Digital programme. The scheme is due to be launched in April 2026, with firms with a turnover of between £30,000 and £50,000 having to switch to the new system by April 2027.

The upcoming change is asking serious questions of the ability of the small business sector to adopt programme-compatible software and ensure tax compliance. According to the FSB, over a quarter of small firms do not know when they will bring onboard the new software.

Affording tax compliance and how alternative finance can help

Looking at the figures, it is easy to understand why the FSB is concerned enough about small business tax compliance to be lobbying the government to make the process more efficient and less costly.

Already under significant pressure, the financial burden of tax compliance, including in relation to the introduction of the new digital system, is an unwelcome addition to the list of costs for small firms. Accessing finance for investment in systems and training or services to achieve compliance is challenging. This is where alternative finance can help.

Small business lending from traditional sources remains subdued into Q2. Accessing finance from high-street banks remains difficult for a significant amount of small firms. As a result, alternative lenders have become increasingly embedded in the small business finance landscape.

Services such as invoice finance, asset finance and peer-to-peer lending are proving a vital source of capital for small businesses in the current funding climate. These alternative finance facilities, which offer a more easily accessible, affordable and personalised approach to lending, are helping small businesses survive and target recovery, stability and growth.

Notably, the Growth Guarantee Scheme is providing a wide range of finance facilities to smaller firms, including asset finance, invoice finance and asset-based lending. This is further proof that alternative lenders are increasing filling the small business funding gap.

Small firm finance options for managing tax compliance bills

Tax isn’t glamorous but proper financial reporting and tax compliance are very important, not least as the small business sector gears up to switch to the new digital tax system. While the FSB is campaigning to reduce costs, it is vital that small firms can afford to carry out the processes correctly and can do so in a way that allows them to enjoy key benefits.

As firms look to access finance, against the backdrop of continued small business lending caution from traditional banks, it is critical that key decision-makers are aware of all the finance options available to them, including the services of alternative lenders.

To find out more about A&T Business Associates services, contact Tony Hedger on 01903 602211 or tony.hedger@atbusinessassociates.co.uk.