The Making Tax Digital (MTD) initiative has truly transformed the UK tax system. It’s hoped that Making Tax Digital will make it much easier for businesses and individuals to get their taxes right and stay up-to-date with their financial affairs, but this change has also caused confusion for many taxpayers.
In particular, business owners are often unsure about which software they have to use to stay MTD compliant. For example, can a business comply with MTD rules by using bridging software, or do you need full accounting and tax software? Discover the answers to all of your burning questions about MTD bridging software in this helpful guide.
What Are the Requirements for Making Tax Digital?
For Making Tax Digital for VAT, which was first introduced in 2019 and expanded to all VAT-registered businesses in 2022, there are a few requirements that businesses must comply with. Business owners must keep digital financial records, maintain a digital link with HMRC and send VAT returns to HMRC using compatible software. It’s no longer possible to manually enter your VAT returns into the HMRC gateway.
From 2024, self-employed individuals will have to comply with Making Tax Digital for Income Tax if their annual income is above £10,000. They will have to use software to keep digital records and submit quarterly updates to HMRC.
What Is Bridging Software?
If you use spreadsheets rather than accounting software to record your finances, bridging software will create a digital link between your business and HMRC so you can transfer data from your spreadsheets to them. Therefore, bridging software can help you comply with certain MTD rules by allowing you to file your taxes digitally.
However, bridging software isn’t an all-in-one MTD solution. Bridging software doesn’t enable you to keep digital records of your finances or maintain digital links between your systems, so it won’t make your business MTD compliant on its own.
Bridging Software: Pros and Cons
Many people choose bridging software as a temporary MTD solution before they start using cloud-based accounting software. If you’ve been using spreadsheets for your finances for a long time, it may take you a while to adjust to the new system and find the right accounting software, so bridging software can help you stay MTD-compliant during this transition period.
However, you shouldn’t rely on bridging software as a permanent solution. Bridging software won’t help you keep digital records and comply with all of the MTD requirements, so you’ll need to find MTD-compliant cloud-based accounting software.
Even though accounting software is more expensive than MTD bridging software, the price is definitely justified by the extra features you’ll gain, such as invoice creation, cash flow forecasting, billing, payroll and in-depth reports. Therefore, it’s best to immediately transition to MTD accounting software or only use MTD bridging software as a short-term solution.