ICAEW’s Tax Faculty explains what to consider when choosing software for making tax digital (MTD) for income tax.
MTD income tax
MTD income tax is being phased in from April 2026. Those that are required to comply with the requirements will need to use software to keep their accounting records and to submit quarterly updates and an annual tax return to HMRC.
Software requirements
The regulations require taxpayers to maintain accounting records and to submit quarterly updates and their final tax return using “functional compatible software”.
“Functional compatible software” means a software program or set of software programs which have the functionality to
- record and preserve digital records in a digital form;
- submit to HMRC quarterly updates and annual tax returns using HMRC’s application programming interface (API) platform; and
- receive information from HMRC using the API platform.
Spreadsheets can be used to maintain accounting records. However, the spreadsheet must be used alongside an MTD income tax compatible software product so that data can be sent to and received from HMRC systems. An existing spreadsheet on its own is not a free solution for complying with the MTD income tax requirements.
If a combination of software products and/or spreadsheets is used there must be a digital link between each of the products from the point that the accounting record is created in functional compatible software. This essentially means that manual transfer and rekeying of data is not permitted once the first entry is made in the accounting records.
Choosing software
HMRC requires that MTD income tax software products meet its minimum functional standards. These standards do not require all of the available APIs to be deployed in MTD income tax software products. This means that different products have very different functionality.
It is possible to use different products for the different elements of the requirements. For example, you can use different products for different trades, for UK property, and overseas property. You can use different products for quarterly updates and for the annual tax return. That is a fundamental part of the design, but this flexibility makes it harder to compare products.
MTD income tax software products are broadly of the following types:
Most full feature software is expected to allow the submission of the whole of the annual tax return, but this should be checked carefully. Some software developers have not yet decided whether they will provide functionality to cover the whole of the annual tax return. Many agents will prefer to use a tax software product to submit the annual tax return even if a full feature product is being used. This is most likely to be one of the existing commercial self assessment products that has been upgraded to become compatible with MTD income tax. Note that not all of these products will be upgraded for MTD income tax, and they will not be suitable if they haven’t been.
Software that offers record keeping and submission of quarterly updates will need to be used in combination with a product that allows the submission of the annual tax return. It is likely that many of these products will be further developed to include the annual tax return, or at least the most commonly used sections of the return.
Bridging products work by taking a feed from or being digitally linked to the spreadsheet or other accounting software product that is being used to maintain accounting records. Most of the existing self assessment software products that are being upgraded will be bridging products in that they will not themselves have functionality for record keeping.
The range of available products highlights the importance of choosing the most suitable software product or products. There are other differences for example:
Each user needs to carry out due diligence on the developers including checking that the software product meets security standards and their needs.
Further information on choosing cloud software:
To help with choosing software the Business Application Software Developers Association (BASDA) has created a free guide to help you select business software:
MTD income tax software providers
Lists of available software products are available on:
- ICAEW - View Making Tax Digital for income tax software providers
- GOV.UK - Find software that's compatible with MTD for income tax
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