Making Tax Digital (MTD) is the UK government’s long-standing campaign in readying businesses for the digitisation in finance. Initially announced back in 2015, Making Tax Digital for VAT started in April 2019 for VAT-registered businesses with a taxable turnover above the £85,000 limit, extending to all VAT-registered businesses from April 2022. The plan was for all businesses to be MTD-ready by 2020, but a global pandemic, threat of recession, and inflationary pressure have forced the government to push back some of the original deadlines.
Another factor the UK government didn’t see coming was the difficulty businesses had in preparing for the changes. A survey undertaken in April 2021 - one year before the deadline for all VAT-registered businesses - of UK finance leaders discovered that just one in five (20%) of businesses back then were fully prepared for Making Tax Digital.
The same survey in 2022 found that while attempting to become MTD compliant, 37% of UK finance leaders said staff training and getting used to new software was the biggest challenge to overcome. Financial reporting (30%), costs of adopting new software (30%), and digitising invoice data (28%) were also highlighted as significant barriers.
Why is accounting software for Making Tax Digital important?
The reason why accounting software for Making Tax Digital is so crucial is because of the potential penalties for late or inaccurate VAT submissions. In January 2023, the previous VAT default surcharge was replaced by a new penalty system, with each late tax return receiving one penalty point up until businesses reached a certain threshold. The threshold and maximum points businesses can receive are dependent on their own accounting period:
| Annually | 2 points |
| Quarterly | 4 points |
| Monthly | 5 points |
You’ll receive an automatic £200 penalty if you reach your threshold and receive an additional £200 penalty for any other late submissions after that. Penalty points will expire automatically after a certain period of time has passed, but businesses that have already reached their penalty point threshold will need to complete a period of compliance, submit all returns by their deadline, and submit all outstanding returns for the previous 24 months before that happens.
How does accounting software for Making Tax Digital keep me compliant?
Accounting software for Making Tax Digital helps businesses get their tax right, at the first time of asking, and without error, therefore avoiding the potentially high price mentioned above. For those already using modern accounting systems, the main challenge in switching to MTD will be learning the new digital processes and procedures set in place by HMRC. For those that relied on using paper-based or manual processes, the challenge will be a bit more difficult with new software to get to grips with. But in the long-term, there’s no doubt that the digitisation of VAT returns will make managing their tax affairs much more simple, safe, and less expensive.
One key thing that accounting software can help with is the storing of historical financial documents. Because businesses must keep a full and accurate record of their VAT returns which can be digitally submitted to the government, moving to accounting software simply makes sense from a time and compliance perspective. As long as the accounting system is kept current, accountants won’t need to double-check that the tax information they submit is correct. Also, in the case that a return was reported as inaccurate, it also means that staff won’t have to spend hours attempting to find the original paper records in company filing cabinets.
Switching to accounting software for Making Tax Digital simply eliminates most, if not all of the challenges that used to exist. Accounting teams are notified of tax-related deadlines ahead of time, significantly reducing the chances of late submissions and financial penalties. Also, with real-time access to reporting figures, businesses receive a much more accurate picture of day-to-day cash flow.
What options are there when it comes to Making Tax Digital accounting software?
By law, every VAT-registered business has to be signed up for MTD. This includes using compatible accounting software to store VAT records and digitally submit returns. Some of the most popular accounting systems such as Xero, QuickBooks, and Sage all comply with Making Tax Digital, but there are many more that can help support businesses on their MTD journey. As of the time of writing, there are more than 560 MTD-compliant software providers which the UK government website lists here.
When deploying MTD-compliant software, it’s also important to factor in the following points:
- User-friendliness: For staff that haven’t used MTD-specific software or generic accounting software in the past, getting them up to speed is vital in the success of submitting digital tax returns. The user experience is key to this, as training staff can be costly while constantly requesting customer support can be time-consuming.
- Cloud-based: With most businesses these days implementing some kind of remote or hybrid working environment, staff need to be able to access platforms and financial information on the move. On-premises software isn’t able to support this, while subscription-based cloud-based systems can provide the flexibility, scalability, and security that modern finance departments require.
- Data Security: As accounting software for Making Tax Digital stores sensitive financial documents, it is a perfect target for cybercriminals looking for an easy way to trick staff into providing log-in details or other confidential data. Accounting software isn’t foolproof, however, and staff still need to know of the potential pitfalls and best practices when it comes to sharing and safeguarding information.
- Pricing: As MTD means moving to or upgrading existing accounting software packages, it will come with a cost. However, a HMRC report on the matter found that because of the wide variety of software packages available for businesses, many of which offer free versions and trials, the benefits far surpassed the costs involved in moving to digital.
- Customer Support: It can take time to get used to new software systems, so it’s important that staff are able to get the support they need whenever they need it most. When choosing your MTD-compliant accounting software, look out for those that offer a 24/7 customer support service - especially online - as some issues may mean the difference between compliance and non-compliance.
- Scalability: Depending on their needs, some businesses want to be able to scale their software systems up or down - for example, during tax season or if operating a seasonal-based business. Having the freedom to choose this can also have a knock-on effect on resources, costs, and productivity, so make sure that any accounting software provider is able to meet your demands.
- Software Integrations: Standalone accounting software sometimes isn’t the only thing accountants need to make MTD successful. For example, there are still plenty of businesses still utilising manual processes, something which is resource–intensive, costly, and leads to unhappy staff. When looking into MTD-compliant accounting software, make sure to also research the software integrations on offer, especially those that make use of technologies such as automation that can help improve the efficiency, accuracy, and timeliness of your tax returns.
Moving foward
Making Tax Digital is an ongoing initiative designed to service the needs of everybody from the government to self-employed individuals and landlords. The right accounting software can help you not just stay in compliance with the new regulations but help your business continue to thrive. Embracing digitalization in finance through such software not only ensures compliance but also streamlines financial operations, enhancing efficiency and providing strategic insights into your business's financial health.
