Best Software for Making Tax Digital

Making Tax Digital (MTD) is an initiative by HMRC that all businesses must follow.

From April 2022, if you are a VAT registered business, you should be compliant with the MTD scheme.

This includes submitting VAT returns using MTD-friendly software.

Although using MTD-compatible software will draw the correct figures directly from your accounting system, you will still require an understanding of VAT and how your business's activities should be reflected on your return to ensure the information submitted is correct.

A VAT consultant can help you calculate your VAT and recommend the best digital tax software for making tax digital. Below we will assess the best software for making tax digital for VAT. 

What is the best software for making tax digital for VAT?

As HMRC requires all businesses to follow the MTD scheme, you will need to find the best software for you.

HMRC has some guidance on software that is compatible, so you should first use their search list.

Employing digital software will allow you to submit your VAT Returns straight to HMRC.

This means you will no longer need to use HMRC’s website to submit VAT Returns. All software that HMRC has on their search list has been recognised by HMRC. Some considerations include:

• HMRC does not recommend or endorse products, but the software will work for making tax digital for VAT.
• When you use software for making tax digital, you usually have to pay to use it. There is free software available, but these often have limited features.
• You should spend some time selecting the best software for your business.
• Although using software is the first step in following the MTD initiative, you also need to record your VAT correctly.

It is always best to speak to a VAT consultant before submitting VAT reports, as software can only calculate figures based on the data you have provided.

This means that you could still make a mistake if you are not sure about the process. It is advisable to be fully confident about completing your returns if you wish to avoid HRMC investigations.

What kind of software is available for making tax digital for VAT?

There are 2 main types of software available for making tax digital for VAT. The first is known as ‘record keeping’ software.

This will store and update your records digitally and will work with HMRC systems, so that you can file a digital VAT Return.

The other type of software is known as ‘bridging software’. If you use non-compatible software for VAT, bridging software will ‘bridge the gap’ so you can send the required information to HMRC digitally.

This ensures your VAT Returns are in the correct format for HMRC. Bridging software works with accounting systems, digital bookkeeping products, and spreadsheets. 

You may have heard of some common record keeping and bridging software for VAT, such as QuickBooks or Xero.

A VAT consultant can help you use digital software correctly, so you pay the right amount of VAT. They can also help you with VAT Returns and claiming input tax.

You could be fined if you submit the wrong amount of VAT, so it is important not to rely solely on software.

A lot of the software available allows you to pay monthly. You can also buy yearly plans. The cost of the software does not matter as long as it is compatible with HMRC.

What is Making Tax Digital (MTD)?

MTD is a government initiative launched by HMRC in 2019. It requires businesses to make tax digital for VAT. From April 2022, if you are a VAT registered business, you should be compliant with the MTD rules.

This includes signing up for Making Tax Digital. 

HMRC requires all businesses to have compatible software to enable them to submit returns using MTD. Therefore, you need to ensure you find the best software for making your tax digital.

From April 2023, Self-Assessment taxpayers also need to be compliant with MTD. 

Currently you only need to do this if you are a VAT registered business. All businesses will eventually need to follow MTD though, so it is best to start the process now.

Any information on VAT will need to be accessible for up to 6 years, making digital software an easy solution for storing data.

Consider a VAT consultant

A VAT consultant can give you the advice and support you need to make digital VAT Returns.

They can help you to file a digital return and calculate the correct amount of VAT. A VAT consultant can also show you how to save money on VAT.

Even if your business is not VAT registered, it might be worth registering voluntarily so you can reclaim VAT on purchased items for your business.

The best software for making tax digital for VAT will depend on what software works best for you. HMRC has a list of software that is compatible with their MTD initiative.

You can use record keeping or bridging software.