ICAEW shares the latest information about the Making Tax Digital (MTD) software that taxpayers and agents will need to keep digital records and to submit information to HMRC.
MTD VAT
All VAT registered businesses must now use a commercial software product to submit VAT returns to HMRC or appoint an agent to submit their returns on their behalf. The only exception is those that can claim a digital exclusion exemption. Businesses with the necessary skills can register with HMRC as a software developer and develop their own bespoke software solutions, but this will be the exception. MTD software uses HMRC’s API (Application Program Interface) to send and receive data from HMRC.
VAT registered businesses are required to keep digital records. These records can be maintained in more than one program or software product. The use of spreadsheets, either to record individual transactions or as part of a suite of software and spreadsheets is permitted. However, the spreadsheet will need to be either API enabled or used in combination with an MTD compatible software product that can send and receive data via HMRC’s API platform (bridging software). Where the records are maintained in more than one program or product there must be digital links between each of the pieces of software.
MTD income tax self assessment
From April 2026 similar digital record keeping and filing from software requirements will apply to income tax self assessment (MTD ITSA). The requirements will initially apply to those with income from self-employment or property above a threshold of £50,000 turnover/gross income. The threshold will be reduced to £30,000 from April 2027.
Choosing software
How an organisation approaches the selection of MTD compatible software depends on their existing level of technology maturity and their business model. For example, an organisation that makes very little use of technology may wish to consider a spreadsheet along with bridging software – an application that will be able to extract the contents of a spreadsheet and upload the return to HMRC. It is also worth considering the long-term future of an organisation. It is fair to say that the rate of change in technology and business has never been faster. That rate of change will only ever increase. As a result, all organisations will need to consider how they will remain competitive in the future. A case could, therefore, be made to invest in a more comprehensive application that could fulfil the needs of an organisation in the future.
Organisations that are already making extensive use of information technology will need to ensure that their software supplier is going to provide MTD compatible versions of the applications that they may use. In these cases, the existing and future requirements of an organisation will need to be considered. In recent years we have seen a number of major changes to UK legislation; for example, GDPR, open banking and MTD. In many cases it may be easier and more cost effective for an organisation to choose an application that resides in, or is at least connected, to the “cloud”. Applications that are hosted on the internet (in the cloud) are able to make connections with other digital services and as a result provide increased functionality and flexibility.
HMRC requires only some of the available APIs to be used in MTD software (minimum functionality standards). For example, some products do not use the APIs that can make liabilities and payment information available in software. This should be considered when choosing a software product as the user experience and functionality offered can vary considerably.
To help an organisation choose software the Business Application Software Developers Association (BASDA) has created a free guide to help you select business software:
During February 2019 the Tech Faculty produced a webinar on how to choose software. A number of questions were asked at the webinar which have been answered here.
MTD software providers
HMRC is working with a large number of software developers. More than 500 different products are available for MTD VAT but, so far, only a handful of products are available for MTD ITSA.
It is essential that you check with your current software provider to understand if (and when) they are going to be providing MTD compatible software and whether the necessary upgrade will be provided for free, or it will be necessary to upgrade to a newer product. It is also important to check how many licences are required if a taxpayer has multiple trades and/or property income that need to be reported separately to HMRC. Accountants may wish to use a different software product for the year end final tax return process - this is possible.
HMRC does not approve or recommend MTD software. To be recognised there has to be:
Each user needs to carry out due diligence on the developers including checking that the software product meets security standards and their needs.
Lists of available software products are available on gov.uk and can be filtered according to a number of different criteria.
Cyber security
The value of company, staff and client data cannot be underestimated. Data protection has never been more important. Use the links below to find out more as to how an organisation can protect its data assets from cyber threats and in turn improve its business resilience.
Useful resources
ICAEW Technology Accreditation
ICAEW's Technology accreditation covers a range of products all designed for the accountancy industry. The scheme covers a range of products for members working in both practice and industry. Current accreditation categories include Accounts Production Final Accounts Software, Financial Products Software and Personal and Corporation Tax Software.