Everything You Need to Know About Choosing MTD Software for Your Business

​Making Tax Digital, or MTD, requires VAT registered businesses and self-employed individuals above a certain income level (from April 2026) to use specific software to keep records and submit their tax information to HMRC. This makes choosing the right application a critical step for compliance. In this article, we look at what your software needs to do and the types of application available.

What Does Your MTD Software Platform Need To Do?

Any software you choose for MTD compliance must be able to perform three essential functions. These are:

1) Create and store digital records: the platform must be able to keep digital records of your income and expenses for self-employment, VAT, or property rentals.

2) Produce quarterly updates: the software needs to send summary updates of your income and expenses to be HMRC every three months.

3) Submit your final tax return: finally, the platform must be capable of submitting your end of year tax return to HMRC by the 31st January deadline.

One more thing: The platform must also be officially recognised by HMRC as compatible with its MTD systems and API.

So, What Are The Main Types Of MTD Software?

There are two primary categories of software that can help you meet your MTD requirements, with the best choice for your business depending on how you currently manage your accounts.

Software that creates digital records: this is the most common solution chosen by businesses, and includes a range of all-in-one accounting packages that handle every aspect of MTD compliance. These platforms allow you to create your digital records directly within the platform. Key features often include:

1. Linking to your business bank accounts to import transactions automatically
2. Scanning receipts and invoices to capture expense data at source
3. The option to manually enter income and expenses

This type of software is often the most efficient option for businesses that want a single, integrated system to manage their finances and meet all their MTD requirements, from record-keeping to submissions.

Bridging software: if you already use spreadsheets or another accounting tool to manage your finances and don’t want to shake up the chicken coop too much, bridging software may be the right choice, at least initially. The software acts as a connector or bridge between your existing records and HMRC’s MTD system. This option is ideal for businesses that want to continue using their current record-keeping methods. For example, if you maintain detailed spreadsheets or a digitised paper ledger, bridging software can read this data and format it correctly for submission to HMRC without you having to invest in a completely new platform.

What Is The Best Choice Of Software For Your Business?

You won’t arrive at the best choice of software by simply picking one at random from HMRC’s approved list. You’ll need to consider your specific business needs, priorities, and budget. Ask yourself these questions:

1. What are my income sources? Make sure the platform supports all your income types, such as self-employment, dividends, UK property, foreign property, and so on.
2. How will I make submissions? Does the platform handle quarterly updates, the final tax return, and VAT submissions, or do you need separate tools?
3. Does it fit with my budget? Prices vary significantly between platforms, and while there are some free products and plans available, these may have limitations, so it’s important to check what is included.
4. What if my business needs change? If you are a landlord but plan to start a new business, for instance, check that your chosen platform can support your future income streams.
5. Do I work with an accountant to do my accounts internally? Why do businesses need accountants with all this MTD software available? The answer is the combination of insight, expertise, and time savings that come with working with a professional outsourced accountant. Coupled with the convenience of a modern accounting platform, this can add up to significant time and financial savings, as well as a more stress-free tax reporting experience. Some platforms, such as Xero, are known for their excellent collaboration tools, making them ideal for businesses that work with an accountant.

HMRC has a software finder tool to help you narrow down a personalised short list of compatible options. However, if you would like to find out more or speak to an adviser in person, please feel free to contact Vanilla today by clicking here, or by calling 0115 647 4506.

​Image source: Canva