A survey of 500 businesses across the UK showed that only a quarter (25%) use software currently, while the same proportion use a solely paper-based system. The rest employ a mix of both, or use packages such as Excel spreadsheets.

Under the government's making tax digital plans, from April 2018, small, non-VAT registered businesses will be the first UK businesses which must comply with the new digital reporting framework. This will make digital record keeping compulsory in addition to a new requirement to make four returns of information to HMRC each year. By 2020 this will apply to all businesses.

ICAEW is warning the move could raise costs for businesses and it is likely that a greater burden will fall on sole traders, with 82% of one-person businesses needing to make the move to digital record keeping.

The manufacturing and construction industries are likely to be hardest hit, as this is where 41% still rely on paper based records.

Of those surveyed, over half (55%) support the general move by HMRC to encourage businesses to send in their information online but only 18% felt it should be made compulsory, as currently proposed.

Paul Aplin, chairman of ICAEW technical committee, said: ‘We fully support HMRC’s ambition to increase the use of digital technology to make meeting tax obligations more straightforward. These changes shoul,d however, be a matter of choice for business owners and should not be made mandatory.

‘Businesses should be able move to the new system over time when they are ready. Government claims that these proposals will contribute to reducing business tax compliance costs by £400m, but we fear that many small businesses will in fact face additional costs when digital record keeping is made mandatory.’

Find out more about digital tax accounts at Making tax digital: a sneak preview into HMRC's plans