Software Choices for Making Tax Digital (MTD)

In our last two articles, we have explained the government’s Making Tax Digital for Income Tax initiative (MTD for IT) and how it may affect you.  In this article we take a look at appropriate choice of software, penalties and the next steps you need to take in preparing for the scheme. 

The following alternative software solutions may be considered:

• API-enabled software
• API-enabled software and accounting software
• A single spreadsheet and bridging software
• Multiple spreadsheets and bridging software
• Accounting software, a spreadsheet and bridging software.

We currently support clients using Cloud Accounting Software, which is fully compliant with the digital record-keeping requirements of MTD for VAT and MTD for IT, and includes bridging software through which the quarterly returns will be submitted direct to HMRC.   We shall be able to enable clients for MTD for IT from within this software.  

A full list of MTD compatible software providers may be found under the following link:

https://www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-income-tax.

Advantages of using Cloud Accounting Software

Cloud Accounting Software has significant advantages over the traditional ways of bookkeeping.  

It allows you to:

See a clear picture of your current financial position in real-time

• Have your accounts 100% online, so there is no software to install and everything is backed up automatically. Updates are free and instantly available
• Avoid upfront accounting software costs – upgrades, maintenance, system administration costs and server failures will no longer be an issue
• Have your bank feed your data directly into your accounts on a daily basis
• Take a photo on your phone of a purchase invoice to post it immediately
• See your results, who owes you money, who you owe to and your business bank balance 24/7, 365 days of the year, from your phone.

 Most importantly, Cloud Accounting Software will be fully compliant with HMRC and MTD for IT.

Registering for MTD for IT

Individuals will have to register for MTD for IT, as HMRC will not automatically register you.  This can be done through your Government Gateway account.  If you do not already have one you will have to sign up for one.

You cannot register for MTD for IT until you are already using MTD compatible software.

Tax agents and accountants will be able to register on behalf of clients.  We will, of course, be happy to do this for you should you wish.

Penalties

Late submissions

Penalties for late submission of quarterly reports and end of year reports for individuals within MTD will move to a points-based system.

Taxpayers in MTD will receive a point each time they miss a deadline; these will accumulate until a threshold of 4 points is reached.  Upon reaching the threshold they will receive an immediate £200 penalty.  From that point any late submission will result in an immediate £200 penalty.

In order to reset the penalty position there will need to be a period of compliance where all submissions are made on time – four quarterly updates or two end of year returns – and all submissions required for the previous 24 months must have been made.

Late payments

The penalties for late payments of tax under MTD for IT will be:

• You will be charged a penalty equal to a percentage of the tax owed and paid within 30 days of the due date
• After 31 days there will be a daily accruing charge until the tax is paid.

Leaving MTD

If your qualifying income drops to below the mandation level for 3 tax years in a row you will be able to opt out of MTD for IT.

Next Steps

Getting ready

We have already identified which of our clients are affected, based on the 2023/24 tax returns, and will be contacting you individually. 

HMRC have also been looking at the tax returns submitted for 2023/24 and will be writing to anyone that had combined gross income from self-employment and / or property of over, or near, £50,000.

After you have filed your tax return for 2024/25 HMRC will advise you whether you are required to join MTD for IT for the 2026/27 tax year.

Record keeping

If you are not already keeping digital records, now is the time to make this move in order to ensure a smooth transition to MTD reporting.

Separate business banking

Now is the time to separate out your business banking from your personal banking if you currently have a single bank account, to avoid having to analyse multiple personal transactions as a part of MTD for IT.

In addition, you should also consider getting a credit card for business purchases only.

HMRC Pilot in 2025/26

HMRC is running an MTD for IT testing programme throughout 2025/26. Taking part could help you get to grips with the digital record keeping and quarterly reporting requirements, before they become mandatory. It is possible to sign up at any time during 2025/26 and penalties for late quarterly reports will not apply during the test period. If you would like to take part, please speak to us for more details.

We are here to help

Now is also a good time to consider whether you are happy to undertake the reporting yourself, or whether you wish to include this in the services that we provide to you.

If you have any queries or concerns, please do contact us.