Learn what Making Tax Digital is, how it can help you manage your tax affairs, and the best compatible software solutions for online tax filing.
Key Takeaways from this Post
Effective since April 6, 2023, the new UK tax system requires all citizens and companies to keep a digital record of their transactions. The HM Revenue and Customs (HMRC) will use the data to calculate any income or value-added tax due.
As an e-commerce seller, your business must be VAT-registered, and you must submit VAT returns in addition to your quarterly income tax returns. This is made possible by using Making Tax Digital (MTD) software applications - fully MTD-compliant software can help immensely with your tax return submission.
This article will help you select the right MTD software to submit income tax updates. All these tools comply with the latest tax digital rules and offer a proper tax digital service to self-employed businesses, sole traders, and enterprise-level businesses.
What is MTD Software?
Tax Return Submissions are made by filling in forms with data from the sales transaction records held by e-commerce sellers.
MTD software is accounting software compatible with making tax digital that helps you record transactions and calculates the tax due.
It allows you to manage your VAT and income taxes easily and submit your returns online. So, in a nutshell, it's a user-friendly integrated taxation solution that automatically calculates the tax due based on your sales records.
The MTD-compatible software can be incorporated with HMRC systems to send routine updates directly to HMRC.
HMRC isn’t selling any software, but it’ll make the Application Programming Interfaces (APIs) available so that other companies may use them to create their own.
This software must be capable of the following:
- Save data in a digital format
- Create a VAT return from the digital records.
- Deliver HMRC with information and VAT returns through the API
- Able to receive data from HMRC
The Best MTD-Compatible Software for e-Commerce Sellers
MTD-compatible VAT software is an essential component to filing your VAT return. Look at the available options and compare features to determine which works best for your business.
Best MTD software for vat returns
Link My Book Favourites
If you ask us which MTD software is our favourite, we’d say Xero and QuickBook. These two are the best available options with tons of features.
The cloud-based solution connects with other accounting software, offering a low-cost solution for accounting. It can be used to keep track of your stock and sales.
Potential consumers may select from various packages with competitive costs and many features.
- An elegant and simple user interface
- Superannuation assistance payments
- Specialising in small business accounts
- Mobile access to data via smartphone and tablet
- Additional charges for extra users and advanced accounting
With the QuickBooks MTD software, company owners can access their financial data anywhere. It allows e-commerce accountants and bookkeepers to log in from any browser. This software is best for service-based businesses.
- More accessible sync with automatic downloads
- Track inventory (FIFO) first-in-first-out
- Accessible permit to data with your accountant and employees
- Lacks invoice formatting tools
Other MTD-Compatible Software Choices
Besides Xero and QuickBooks, there are a few more excellent tools that make your VAT submission and other tax related tasks easier. They are:
This software is straightforward and highly suitable for e-commerce sellers. You can track, record, and file your VAT returns online in real-time.
They offer Excel/spreadsheet integration. Their software is integrated with the HMRC filing portal, so you can file your VAT returns directly and save time.
- Easy to use and understand
- Integrated with HMRC portal.
- You can file your returns online in real-time
- Meet all the MTD requirements
- You can’t remove the file until the calendar year ends
FreeAgent is explicitly designed for service-based businesses like freelancers, agencies, and consultants to help invoice their customers on the spot from any mobile device or desktop PC.
- e-commerce business-friendly
- Good contact and invoicing management
- Customisable tax rate options
- Invoice templates are limited
This software is 100% functional, and MTD-compatible with all of the tools needed for quick and efficient tax and account processing. It has better features than other software tools and works with most platforms.
- Takes up less space
- The support package includes phone contacts and email
- Good support and customer service
- It’s a little complicated for new users
It is a free MTD-compatible software option for Making Tax Digital and filing VAT returns. You can automatically import all your receivables, suppliers, and clients into Anna Money.
After this, the accounting software can easily track your cash flow, organise your assets and inventory, track payments, and much more.
- No Excel files needed
- You can easily track VAT payments and numbers
- Submit VAT returns digitally
- Integrate with the payment system
- Best for accounting, inventory, and tax digital
- Doesn’t offer global bank transfers
Zoho Books is an MTD-compatible software tool that suits the requirements of almost all types of users. It is the best software option for beginners.
Because of the features, the tool is cost-effective with high usability. Users agree that the pricing is quite affordable for a highly functional application for taxes and accounting.
- Versatile reporting tools
- Collaborative with the client portal
- Cost-effective with high usability
- Doesn’t have a desktop version
EasyBooksApp is an accounting software that aims to make managing your business's finances as simple as possible. It includes features like receipt scanning, customer invoicing, and finance reporting so that you can accurately track your taxable income.
All this can be accessed through a handy application. EasyBooksApp has an Online Sync function so data is consistent and backed up across all your devices.
- Continuous data backups for data security
- Set up recurring and automatic transactions
- Free downloadable MTD Summary Guide
- Comprehensive solution for sole traders, self-employed businesses, and couriers
- Currently only available on Mac and iOS
KashFlow helps small businesses manage their bookkeeping duties through a customisable dashboard. Harness the software to request and collect payments from customers, and automatically create and send invoices.
KashFlow connects to a multitude of applications that small businesses will find invaluable, including eCommerce stores, CRMs, and payment processors.
- Lots of integrations
- Link directly to HMRC through the software
- Automatically adds tax to your invoices
- Track and log mileage and other expenses
- UX could be improved
MTDSorted is an MTD software that is specifically designed with making tax digital in mind. It helps businesses take control of their taxes and digital records with features like automatically calculating VAT, VAT return submission, and tracking VAT penalties.
As well as being all about the tax filing process, another thing that makes this MTD VAT software worthy of our list is its price tag. You can get the basic software package for the low low price of £0. This makes it perfect for small businesses with small budgets.
- Free software available
- Lots of MTD information and features
- VAT bridging software; import data from spreadsheets
- Submit VAT returns through MTDSorted
- Large price jump between Pro and Enterprise plans
How to Choose the Best MTD Software for you
As with all software investments for your business, deciding on the best MTD software will take a little time and consideration. We've discussed 10 possible Making Tax Digital Software today, and there are more out there still. Let's take a look at some aspects to think about:
Price is an ever-important factor for business decisions. Weigh up the cost of the time you take to manually manage your accounts and income tax, along with the possible cost of discrepancies within this method.
For example, HMRC can charge as much as 30% of the extra VAT as a penalty for careless mistakes. And, up to 100% for deliberate errors within your VAT returns. Furthermore, you risk additional penalties for late submissions. With this in mind, you need to ensure your digital records are squeaky clean, accurate, and consistent.
As you've seen in this article, there's a Making Tax Digital software for every budget to help you remain fully MTD compliant.
Obviously, the larger your business, the more data you have to work with. And by extension, the easier it can be to make mistakes. Therefore, larger businesses might benefit financially from investing in an eCommerce accounting software, such as Xero or QuickBooks, that can handle all that data. On the other hand, start ups might be better off opting for a free software like MTDSorted.
Are you looking for a no-frills option or do you want a software with all the bells and whistles? Consider features like invoicing, bank account reconciliation, receipt scanning, and financial reporting. If you're not sure whether a particular software has all the features you're looking for, take advantage of the free trials and demos that most accounting software have.
Is it clear that the company behind the software knows the ins and outs of the Making Tax Digital rules? If so, there'll likely be a tonne of information on its website explaining what you need to do and how to do it.
When choosing your eCommerce sales tax software, you should also look out for a company's affiliation with HMRC. Some of the software we've looked at today are HMRC-recognised and you can submit your VAT return directly through it. Others are bridging software so you can transport your Excel files to HMRC.
Other aspects you could look out for include:
- VAT calculators
- Access to your VAT records
- VAT number lookups
Third-party integrations add a whole other layer of functionality and can streamline your accounting process. When your accounting software connects with your eCommerce store, for example, all your transactions are automatically transported to your software, with your VAT calculated to boot. Link My Books is one software that can make this happen.
Additionally, integrating your tax digital software with a payment processor and business bank account can help ensure your system is unified and consistent across all your records.
The Benefits of Using Making Tax Digital Compatible Software
Making Tax Digital compatible software allows you to meet your new obligations by submitting records digitally. Here are some benefits:
Generates Economic Reports
You can create your spreadsheet to get an overview of your sales. The spreadsheet will show your income and the total amount of VAT and other taxes you owe.
Save on Accounting Costs
Using such a tool will save time and money on your accounting bills. A report will help you understand your financial situation and help prepare your VAT return.
Automated Invoicing System
It’s easy to bill your customers and give them the proper tax invoice. These invoices are produced at the click of a few buttons. There is no need to create any manual invoices anymore.
All financial information, including tax reports and invoices, is stored centrally in the software and can be viewed on any device.
The software allows you to automatically create and submit your payroll with your monthly VAT report.
Track and Manage Expenses
Use tax digital software to track and manage your business's expenses. This can help you file accurate tax returns and ensure you're not overpaying in tax.
Can Excel be Used for MTD?
VAT-registered businesses need a bridging software, like Xero, to submit their Excel eCommerce VAT returns. This bridging software effectively acts as a link or 'bridge' between your Excel files and HMRC. This is because HMRC requires your data to be sent to them through a digital link. Bridging software is a simple solution to this.
Final Words on Vat Return Software
You should be careful when choosing the best Making Tax Digital compatible software. Since the law requires tax return submissions, you must choose a solid option capable of doing all the work.
In addition, it is cost effective and time saving to have reliable and MTD-compatible tax return software in your arsenal to file your returns correctly.
Getting Started with Link Books
If you want to remain MTD-compliant and avoid those hefty error fees, a good Making Tax Digital software is not only important; it's vital. With many business processes being moved online, it makes sense that the tax process is also transferred to the online realm.
While this might sound daunting, there is plenty of software out there to make it as simple as possible. Whether you need bridging software for your Excel files, or you want to gather your data automatically with a robust accounting software, various software packages can help.
And if you've got an eCommerce store, you can rid yourself of those Excel files once and for all with Link My Books. Our software links with your eCommerce store so that all your transactions; sales, fees, refunds, etc. are automatically exported to your accounting software. Better still, Link My Books calculates the VAT on every item you sell, regardless of its geographical location.
Bag your free trial today and ensure your VAT registered business remains compliant.