
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.
Effective April 6, 2023, the new UK tax system will require 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
The HMRC portal closed for VAT submissions on November 1st , making MTD-compatible VAT software mandatory to file your VAT return. Look at the available options and compare features to determine which works best for your business.
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.
Xero
Website: https://www.xero.com/us/
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.
Pros
- An elegant and simple user interface
- Superannuation assistance payments
- Specialising in small business accounts
- Cloud-based
- Mobile access to data via smartphone and tablet
Cons
- Additional charges for extra users and advanced accounting
QuickBooks
Website: https://quickbooks.intuit.com/

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.
Pros
- More accessible sync with automatic downloads
- Track inventory (FIFO) first-in-first-out
- Accessible permit to data with your accountant and employees
Cons
- 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:
123 Sheets
Website: https://123sheets.com/

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.
Pros
- Easy to use and understand
- Integrated with HMRC portal.
- You can file your returns online in real-time
- Meet all the MTD requirements
Cons
- You can’t remove the file until the calendar year ends
FreeAgent
Website: https://www.freeagent.com/

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.
Pros
- e-commerce business-friendly
- Good contact and invoicing management
- Customisable tax rate options
Cons
- Invoice templates are limited
Sage Accounting
Website: https://www.sage.com/en-us/

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.
Pros
- Takes up less space
- The support package includes phone contacts and email
- Good support and customer service
Cons
- It’s a little complicated for new users
ANNA Money
Website: https://anna.money/

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.
Pros
- 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
Cons
- Doesn’t offer global bank transfers
Zoho Books
Website: https://www.zoho.com/books/

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.
Pros
- Versatile reporting tools
- Collaborative with the client portal
- Cost-effective with high usability
Cons
- Doesn’t have a desktop version
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.
Syncs Information
All financial information, including tax reports and invoices, is stored centrally in the software and can be viewed on any device.
Easy Payroll
The software allows you to automatically create and submit your payroll with your monthly VAT report.
Final Words
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.