10 Best Making Tax Digital (MTD) Software for VAT

Due to fairly recent changes in the UK’s tax system, all UK businesses registered for value-added tax (VAT) are required to make use of Making Tax Digital, or MTD software. 

The idea of MTD software is to simplify the tax process for businesses and allow for improved tracking and management of tax liability throughout the year. 

Although this new system has added benefits for taxpayers, businesses may need to adapt their existing tax system to ensure their income and tax filing process is fully optimized and compliant. To do this, you’ll need to start using one of the many MTD software options available on the market.

But how do you go about choosing the best MTD software? What do small businesses, self-employed businesses, and sole traders need to know about MTD for income tax returns and filing? Let’s break it down.

Key Takeaways

Ensuring your business is fully MTD compliant is essential for those in the UK—that’s why you should be making use of the Making Tax Digital software that works best for you. Here are the key points to take away from this article:

• HMRC’s Making Tax Digital is poised to simplify the tax filing process, but you may need to adapt and adjust a little bit first.
• You’ll either need dedicated MTD-compatible accounting software or make use of a bridge software to make your current system work.
• There are several MTD software options on the market, each of which has its own pros and cons.

Here’s What We’ll Cover:

What Is Making Tax Digital?

MTD VAT Software: What Is It and How Does It Work?

10 Best Making Tax Digital Software Options

Benefits of Using MTD Vat Software

Factors to Consider When Selecting the Best MTD Software

Conclusion

Frequently Asked Questions

What Is Making Tax Digital?

Making Tax Digital is HMRC’s plan to make the UK’s tax system “more effective, more efficient and easier for taxpayers to get their tax right.” These “fundamental changes” are important because they affect how businesses and individuals report and pay taxes to HMRC.

For you, this means an unsettling transition period from old methods to new processes. This is made even more challenging by concerns about financial penalties for making even genuine mistakes as you adapt to their digital expectations.

But it doesn’t need to be a huge stress. We’ve got you. FreshBooks is fully ‘Making Tax Digital for VAT’ ready. And we’re always prepared for the next step in HMRC’s strategy.

The first thing you need to do is get yourself compatible software. Obviously, we recommend FreshBooks! We know it’s just right for your VAT-registered business. But HMRC has a long list of options. We’ve rounded up a list of 10 respected competitors so you can make an informed decision.

MTD VAT Software: What Is It and How Does It Work?

Making Tax Digital for VAT is the first step in HMRC’s plan to introduce a fully digital tax system. As of April 2022, all value-added tax (VAT) registered businesses must be fully compliant with MTD. To do this, businesses need to adopt one of the many MTD VAT software options.

MDT VAT software is simply digital accounting software adapted to comply with HMRC’s MDT regulations. They either bridge the gap between your current accounting system (such as spreadsheets) to be compatible and compliant with MDT’s file requirements and filing frequency or are intended to replace your system entirely. 

In practice, MDT VAT software works almost the same as any other digital accounting platform. The main difference is that the software needs to be compatible with API, allowing it to communicate with the HMRC system. You simply file your accounts as normal and use the MDT software of your choice to file quarterly. 

So what is the best MDT software for you? Let’s have a look.

10 Best MTD-Compliant Software Options

All these software options have a variety of features. Here we only highlight the software type, VAT-specific features, and pricing. This gives you a clearer picture to compare.

1. FreshBooks Cloud Accounting

Software Type

• Record–keeping software: FreshBooks keeps all your required digital VAT records
• Bridging Software: you can send your VAT returns directly to HMRC through FreshBooks’ portal

VAT Specific Features

• Check the VAT you owe whenever you need to
• View your VAT payment history
• Submit your next VAT return straight from FreshBooks to HMRC
• See all your previously submitted VAT returns

Pricing

FreshBooks has four packages based on the number of billable clients you have.

• Lite: £3.30 per month, up to 5 billable clients
• Plus: £5.70 per month, up to 50 billable clients
• Premium: £9.00 per month, unlimited number of clients
• Select: Bespoke pricing package for unlimited clients and specialized features

All packages include VAT return filing for HMRC MTD. You can try before you buy with a 30-day, no-strings, free trial.

2. Xero

Software Type

• Keep digital VAT records
• Connects directly to HMRC

VAT Specific Features

• See VAT history, details, and VAT return due dates
• Accessible to check and change before submission
• Directly submit a VAT return to HMRC from Xero

Pricing

Xero has three levels of pricing:

• Starter £10 per month
• Standard £24 per month
• Premium £30 per month

All of these plans include ‘Submit VAT returns to HMRC.’ The plans each have at least 6 features and a variety of optional add-ons to appeal to a range of businesses, like payroll and submitting CIS returns. You can also quickly compare Xero with FreshBooks to make better business choices.

You can also try Xero for 30 days for free, with the option to cancel at any time. This gives you access to all the features to help you decide which plan suits you best.

3. QuickBooks

Software Type

• Bridging software supports standard and cash schemes
• Up-to-date MTD for VAT data collection

VAT Specific Features

• VAT error checker
• Submit completed VAT returns
• Full MTD compliance for your record-keeping

Pricing

QuickBooks has three pricing options, ranging from the Simple Start at £12 per month to the £30 a month ‘Plus’ plan. All three include ‘Check VAT return’ and ‘Submit VAT directly to HMRC.’ You can add payroll to your package for an extra standard or advanced amount. There’s also a QuickBooks free trial option.

4. FreeAgent

Software Type

• Record keeping that follows all the MTD for VAT rules
• File VAT returns online

VAT Specific Features

• VAT returns are generated automatically
• Support for cash basis and invoice VAT returns
• Submit VAT returns and make VAT payments directly to HMRC

Pricing

If you have a business bank account with NatWest, Royal Bank of Scotland or Ulster Bank NI you can get FreeAgent for free – including their MTD for VAT services. FreeAgent divides their pricing structure into types of business and you need to add VAT on top:

• Sole trader: £9.50 per month for the first 6 months, then £19. Or an annual charge of £95 for your first year, then £190.
• Limited company: Monthly, first 6 months £14.50, then £29. Or £145 for the first year and then an annual £290
• Partnerships and LLP: First six months for £12, then up to £24. Or £120 for the first year, then £240 annually

5. KashFlow

Software Type:

• Cloud accounting software that keeps your bookkeeping and data aligned with MTD for VAT
• Digital VAT submissions directly to HMRC

VAT-Specific Features:

• VAT-registered businesses can have VAT automatically added to invoices
• Live VAT liability dashboard
• VAT reports
• VAT return history

Pricing

KashFlow has 3 monthly pricing solutions:

• Starter Package price: £8.00+VAT
• Business Package price:£16.50+VAT
• Business + Payroll price: £22.50+VAT

And 3 annual prices of £56, £121 and £160 respectively – +VAT.

All their accounting packages let you manage and submit your Value Added Tax return online.

6. Sage Business Cloud Accounting

Software Type

• Accounting software that manages bank transactions, cash flow, invoices, self-assessment tax returns for the self-employed, and everything else you’d expect from a system designed for businesses.

VAT Specific Features

• Live running total of your tax bill liabilities
• Data capture of all necessary VAT details
• Submits quarterly VAT returns directly to HMRC

Pricing

Sage has 75% off for 4 months across their pricing options:

• Start package: £3 (£12)
• Standard package £6.00 (£24)
• Plus package £7.50 (£30)

This is their per-month pricing, with the amount it goes up to after your first 4 discounted months. You also need to add VAT. All 3 packages include calculating and submitting your MTD VAT data and submission to HMRC.

7. Zoho Books

Software Type

• End-to-end online accounting
• Connects seamlessly to the UK Government’s portal for VAT Return filing

VAT Specific Features

• One solution across multiple VAT schemes
• International trade recorded by VAT duty
• Generates business reports to show VAT liability
• Easily lets your accountant work within the software at no extra cost

Pricing

Zoho Books has a 14-day free trial of each of its 3 pricing plans. They range from £6, £12, and £18 per month. Or £60, £120, and £180 per year. All 3 plans include VAT records, VAT MOSS reports, and filing VAT returns.

8. QuickFile

Software type

• Bridging software
• Record-keeping software

VAT Specific Features

• Record everything you need to meet your digital VAT requirements
• Submit VAT returns digitally
• See your entire VAT history and check what VAT you owe in real-time

Pricing

QuickFile prices on a sliding scale, based on “the number of nominal transactions created over the previous rolling 12-month period.” The first software package is completely free for extra-small, small, and medium-sized businesses. That means businesses with up to 1000 nominal transactions. For businesses over that number, it’s £45+VAT per year. Even the free packages include MTD for VAT returns, full multi-currency support, and banking automation. This is great for QuickFile customers that are self-employed VAT-registered businesses.

9. Adminsoft Accounts

Software Type

• Record-keeping desktop software recognized by HMRC

VAT Specific Features

• Bridge between your current spreadsheets and HMRC’s VAT return submission portal
• See your previously submitted tax returns and bills paid
• Submit your tax return directly

Pricing

Adminsoft Accounts is downloadable for free. There is the option to buy a Software Registration Key in order to eliminate the advertising. This starts at £199 for one user.

10. MTDSorted

Software Type

• Digital bridging software
• Record-keeping system for MTD

VAT Specific Features

• Spreadsheet importer to transfer your VAT details
• Either use MTDSorted to bridge across to HMRC’s portal from your existing software or send your VAT return directly to HMRC

Pricing

Businesses can access MTDSorted’s Lite plan on their platform for free. This includes accountant access to all the mandatory bookkeeping and filing elements you need to be MTD for VAT compliance. They also have a Plus Plan, costing £15 per month, which gets you access to their full accounting experience. You can try this for 30 days for free.

Benefits of Using MTD VAT Software

There are many great benefits of using MTD VAT software for your business over other methods. These benefits include:

• Simplified bookkeeping – Thanks to automation features, changes will automatically be reflected across all relevant reports. This leaves less margin for error.
• Easy sharing – The online, digital nature of MTD software means your data can be easily shared with your accountant or bookkeeper.
• Automatic reports – MDT software automatically generates financial reports for your business, providing detailed insights without the usual time commitment. 
• Reduced accounting costs – Because the MDT software completes so many routine tasks automatically, you’ll spend less money on accounting and bookkeeping services.
• Always accessible – Your accounting information is available to you no matter where you are in the world, provided you have an internet connection. Most accounting software also offers a mobile app, simplifying things even further. 

Factors to Consider When Selecting the Best MTD Software

With so many options out there, it’s important that you consider these crucial factors when determining the best MTD software for your needs.

Compliance with MTD Regulations

First and foremost, it’s vital that your chosen software is fully compliant with MTD regulations. HMRC requires you to use functional, compatible software that allows you to record and store digital records of tax affairs, provide HMRC with information, submit income tax updates from the data held in those records, as well as receive information from HMRC.

Integration with Accounting Software

If you’re already using accounting software you like, you should see if they have an option for MTD compliance. Otherwise, you should see if the MDT software options you’re considering will integrate into your current accounting software and system. 

User-Friendliness and Ease of Use

Your MDT software should be simple yet capable, with an intuitive user interface and simple functions for the tools you need. Remember that you may not be the only person using this software later on, so try to choose something that will be easy to learn. 

Reporting Capabilities

The best MTD software will be able to automatically generate important reports, providing detailed insights into your bank accounts and the overall financial health of your business. The more types of reports your software can create, the better off you’ll be.

Data Security

Last but certainly not least, it’s vital that you choose software with an extremely high standard of data security. Your financial details must be stored securely, which is more of a concern when using a cloud-based accounting option. Look for SSL encryption, encryption of other important info like cardholder data, and firewalls. 

Conclusion

As you can see, many companies provide software that’s more than capable of simplifying the process of filing VAT returns while remaining compliant with MTD. FreshBooks does it in the easiest way possible.

Tax compliance is fully integrated into the rest of your business’s financial health. So you can make business development decisions based on a holistic picture with every relevant detail.

That’s why people love FreshBooks. You’ll find the information to support any business developments within a few clicks. We get you back to your customers – yes, even at tax time!

Click here to get started.

FAQs on Making Tax Digital Software

Is MTD mandatory?

MTD compliance is mandatory if your company’s taxable turnover exceeds the £85,000 VAT threshold. You can only apply for an exemption to MTD for very specific reasons, like your location inhibiting your access to the internet. Those voluntarily registered for VAT can comply with MTD, but it’s not mandatory until 1st April 2022.

What do I need to do for Making Tax Digital for VAT?

There are two main requirements to being MTD for VAT compliant:

• You must keep the correct digital VAT records
• File your quarterly VAT returns online

You need the right accounting software to meet both of these obligations. Any linking software to connect your records with HMRC must be in place by the first VAT accounting period starting after 1st April 2021.

Will HMRC provide free software for Making Tax Digital?

Despite initial discussions about providing free MTD software, HMRC decided against it. As an alternative, they created software called ‘application programming interfaces (APIs). These enable multiple separate programs to share digital data. We and other companies use them to ensure the VAT records in your FreshBooks account are compliant and your VAT returns can easily be transmitted to HMRC.

What is the deadline for Making Tax Digital?

The deadline for submitting your VAT return and paying your VAT bill through MTD is 1 calendar month and 7 days after the end of your accounting period.

Who is exempt from Making Tax Digital?

Companies are currently exempt from MTD if:

• Taxable turnover hasn’t been over £85,000 since April 2019
• You or your business are going through an Insolvency Procedure
• You’re already exempt from MTD

HMRC considers exemption applications on a case-by-case basis and will consider reasons like religion, disability, location, and age.

How do I submit a digital VAT return?

If you don’t already use FreshBooks, you need to sort out compatible MTD software before you do anything else. Then you can sign up for ‘MTD for VAT’ through your Government Gateway account. You need to get all your information together before you start, including your VAT registration number and most recent VAT return.

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