Everything You Need to Know About Making Tax Digital Software
You may have heard the phrase, but what is "Making Tax Digital" (MTD) actually all about. In GOV.UK’s own words, MTD is: “How HMRC is making it easier for individuals and businesses to get their tax right and keep on top of their tax affairs.” The department aims “to become one of the most digitally advanced tax administrations in the world.”
A grand objective. But what does this mean for you and your business?
The underlying expectation is that taxpayers of all kinds will find it easier to get their tax right because the online system is more efficient and effective.
In 2019, the first phase of the plan was introduced—"Making Tax Digital for VAT." It has two main elements:
- File quarterly returns online, using compatible software
- Maintain your business records in a digital format
Your software is a crucial element in meeting your value added tax (VAT) obligations.
Here’s What We’ll Cover:
Who Needs Making Tax Digital Software?
If you are a VAT-registered company, with an annual turnover of £85,000+ in the 12 months running up to March 2019, then you need to work out when you must file your MTD for VAT returns. This is based on the dates of your VAT quarters and when you become registered. It's an essential part of being MTD-compliant.
Basically, if you registered for VAT from 1st April 2019, you need to be MTD compliant straightaway. There is the possibility of late registration penalties, so don’t hang about on this one.
If you don’t meet this annual turnover figure, you can still register to pay VAT and MTD for VAT voluntarily. By 2022, all registered businesses—regardless of turnover—will have to register for MTD.
What About COVID-19 Issues?
As reported by the Association of Taxation Technicians (ATT): “On 30 March 2020 HMRC confirmed an extension to the deadline for implementing digital links for MTD for VAT.”
The department said: "We understand that the impact of COVID-19 is creating extremely difficult times for all, and we are committed to helping in every way possible all those businesses facing unprecedented challenges. Therefore, we are providing all MTD businesses with more time to put in place digital links between all parts of their functional compatible software. This means that all businesses now have until their first VAT return period starting on or after 1 April 2021 to put digital links in place."
Will HMRC Provide Free Software for Making Tax Digital?
During the first talks about Making Tax Digital, there was discussion about the department bringing out accounting software that would be free for taxpayers. Unfortunately, it didn’t happen.
Instead, they have application programming interfaces (APIs) that are used by companies like FreshBooks to make their accounting software compatible and compliant with making tax digital. An API is software that connects two or more programs together so they can exchange data. This means you can meet both the requirements to keep digital VAT records and use online reporting for your VAT returns.
These APIs are not static. The government’s ‘third-party tax software and API strategy’ acknowledges that technology develops and has “richer capabilities.”
HMRC describes the benefits of not having free, digital government software to meet this new MTD liability as being better for the consumer. That’s you, the taxpayer.
It states: “Commercial software developers can offer a more flexible and tailored range of options, functionality and technical support that can cater not just to the requirements of the general business population but also specific businesses and sectors like agriculture, construction, landlords and freelancers.”
Can Excel Be Used for Making Tax Digital?
Can’t I just use the spreadsheet I’ve always used? The frustrated cry of business owners that are already dealing with more than they expected, and who don’t have the time to learn a new way to do an old job.
It may feel like the government has come up with a solution to a non-existent problem. You’ve always had pristine books, never missed a deadline, and had accurate reporting throughout your business life. So why are they throwing this at you—especially right now. Or maybe you’ve invested in a bespoke accountancy software to streamline your finances. And now it’s incompatible.
We feel your pain.
Unfortunately, your usual Excel spreadsheet is no longer what the government needs. The good news is that you do have an interim option of ‘bridging software.’ This is a type of software that connects your non-compatible spreadsheets with government systems to help make a bridge for your tax return.
What Software Is Compatible With Making Tax Digital?
HMRC doesn’t “endorse or recommend” any particular software for MTD. They do have a list of software that has been “through HMRC’s recognition process."
This is now divided into five search categories:
- Suitable for businesses or agents
- Software for bridging or VAT record keeping
- Software features: View submitted VAT returns, check your VAT bill, see VAT payment history
- Free versions
- Accessible software: Cognitive, visual, hearing, motor impairments
They’ve left it up to each business owner to choose the software that best suits their needs.
Obviously, you'll find FreshBooks on there, as "suitable for businesses or agents." FreshBooks has both bridging and record-keeping software options. FreshBooks has specially designed VAT features: View payment history, view submitted returns, check your balance, and submit VAT returns.
What Is the Best Software for Making Tax Digital?
Well, it would be weird if we didn't say FreshBooks!
Of course, we think FreshBooks is your best Making Tax Digital software option. And here are a few reasons why:
- You can create a Making Tax Digital account and the portal directly connects your FreshBooks account to HMRC. This means you can submit your VAT return and maintain your digital records all in one place.
- It's only 10 steps to this connection. When you register for VAT, you just need to click on 'Yes, I have accounting software,' and 'Yes, my software submits through Making Tax Digital for VAT.' After inputting the rest of the required information, your FreshBooks account and HMRC can talk to each other about your VAT position through the portal.
- The authorisation process keeps your account extra secure.
- Submitting your VAT return is simple. Click on Submit a Return in your FreshBooks VAT portal, upload the correct CSV file, check it looks right, confirm and submit.
Our MTD software is designed to meet all of HMRC's requirements. But our main focus is on making life easier for you. Your clients need you. And this is the least time-consuming way to corral your information and meet your VAT liability. Everybody's happy—the government, you and, most importantly, your clients.
And we keep a close eye on all HMRC developments. So when Making Tax Digital is extended to other areas of the tax process, we'll be ready with the simplest way for you to stay compliant.