Small- and medium-sized firms are unprepared for tough new US tax reporting legislation, a survey has found.

Software firm Blue Bison, part of the Ignition group of companies, found that more than half of respondents to its readiness survey admitted that understanding the requirements of the Foreign Account Tax Compliance Act (Fatca) was their biggest challenge, with Bermuda rated as below average.

Nearly a third remained unsure the impact Fatca — which mandates sharing information on US citizens who have business with foreign financial institutions — would have on their companies.

Some feared that the rules would damage relations with US clients, with many US citizens being rejected by financial institutions and banks — which could lead to legal challenges.

Blue Bison’s Graham Pearson said that large firms and major banks could afford to hire top financial services companies to ensure they are in line with the new law, which requires initial reporting of US citizens and controlling entities by the end of May next year.

But he added: “The small- and medium-sized firms are still a bit confused. They see this as sabre-rattling by the IRS and now the UK has jumped on the bandwagon. They need some help and direction and they need it affordably — that’s our niche.”

Mr Pearson explained Blue Bison, which works with compliance specialists, can provide “a tool kit” of specialist software to identify clients who fall under Fatca.

He said: “Most companies have some kind of access database or another system, but that doesn’t specifically search for what is required by the US Internal Revenue Service or the UK.

“It’s about looking for specific indices to identify the indicators that they may have a US investor and they may have to report on them.

“They are still being educated and they are struggling to find out where to get the information.

“We’re in the software business — we know now what the forms look like and what the reporting requirements are so we can prepare the software.”

The survey covered a variety of offshore jurisdictions, including Bermuda, the Caymans, Jersey, Guernsey, the Isle of Man, Luxembourg and Singapore.

It looked at the state of readiness of firms in the financial sector and focused on key areas like strategy and planning, people, policies and processes and rated companies on a scale of one to five.

The survey found most firms scored just two or three, which indicated a start had been made but that companies had yet to begin entity classification or client contact.

Alongside Bermuda, the Caymans also scored below average, with Switzerland coming out on top for preparation.

Blue Bison’s Richard Parker said: “It is evident that many firms underestimate the volume of work involved and intend to use manual processes and forms for individual and entity classification.”

He added that Organisation for Economic Cooperation and Development (OECD) had also signalled a crackdown on tax avoidance and evasion with its international common reporting standard.

Mr Parker said: “There is a risk that some firms will be overwhelmed with client monitoring and reporting requirements.”