Making Tax Digital: what software small businesses need

The short answer

Making Tax Digital (MTD) is HMRC's requirement for certain UK businesses and individuals to keep digital accounting records and submit returns using software that connects directly to HMRC, rather than filing through manual online forms. In practice, this means using accounting software such as Xero, QuickBooks or Sage (or bridging software alongside a spreadsheet) that's recognised by HMRC as MTD-compatible. Exactly who it applies to, and when, changes over time, so always check the current position on GOV.UK rather than relying on an older article, including this one.

What Making Tax Digital actually requires

At its core, MTD asks for two things: your records are kept digitally rather than on paper, and your submissions to HMRC go through software rather than being typed into a web form by hand. It started with VAT and has been extended to other areas over time, with thresholds and start dates that have shifted more than once since it was introduced. Because of that, this guide deliberately avoids quoting specific dates or turnover thresholds. GOV.UK's Making Tax Digital pages are the reliable source for what currently applies to your business and when.

What "MTD-compatible software" actually means

Software is MTD-compatible when it can keep the required digital records and submit returns directly to HMRC through its official channels, rather than you re-typing figures manually. There are two broad routes:

Full accounting software

Tools like Xero, QuickBooks and Sage are built to be MTD-compatible from the ground up. You record your income and expenses in the software as you go, and it handles the digital record-keeping and submission itself. This is the simpler route if you're starting from scratch, since record-keeping and compliance are handled by the same system.

Bridging software

If you're attached to a spreadsheet and don't want to give it up, bridging software sits between your spreadsheet and HMRC, taking the figures from your spreadsheet and submitting them in the required digital format. This satisfies the submission requirement without forcing a full switch to new accounting software, though it doesn't remove the underlying record-keeping requirements, and a spreadsheet still needs to be kept in a way that meets the digital record rules.

Choosing between them

Check current pricing directly with each provider, since subscription costs and feature tiers change regularly.

How to get set up

1. Check what currently applies to your business on GOV.UK. Rules, thresholds and timelines have changed before and may change again, so start with the current official guidance rather than an article, including this one.
2. Talk to your accountant, if you have one. They'll usually have a clear view on which software fits how your records are currently kept, and many offer a preferred tool they're used to working with.
3. Choose compatible software based on how you actually work, not just features. If you're comfortable with spreadsheets and don't want to change, bridging software may be the simpler step. If you're starting fresh, full accounting software usually pays for itself through saved admin time.
4. Set up digital record-keeping properly, not just the minimum needed to file. Good records make the rest of your bookkeeping easier too, not just your MTD submissions.
5. Automate what you can around it. Once your accounting software is in place, invoicing, quote-to-invoice conversion and payment chasing can often be automated alongside it. Our guide on automating quotes and invoices with Xero or QuickBooks covers this in detail.

Common questions business owners get stuck on

• "Do I need an accountant as well as the software?" Software handles record-keeping and submission; it doesn't replace the judgement an accountant brings to what you can claim, how to structure things, or wider tax planning. Many small businesses use both.
• "Can I keep using my spreadsheet?" Often yes, with bridging software, at least for now. Whether that remains a sensible long-term approach depends on how MTD requirements evolve, so it's worth checking back periodically rather than assuming today's setup will always be enough.
• "What happens if I don't comply?" HMRC's current penalty approach is published on GOV.UK and has changed over time; check there directly rather than relying on older guidance, including this article.

If digital record-keeping is just one part of a wider admin backlog that's eating your evenings, our solution for admin eating your time looks at the problem more broadly, and our guide on 10 admin tasks small businesses can automate this month covers where invoicing and bookkeeping automation fit alongside it. An accountancy practice setting up compliant, automated client processes is a related example; see our example of an accountancy practice automating client onboarding.

What we can help with

We don't give tax advice, and for anything specific to your tax position you should speak to an accountant and check GOV.UK directly. What we can do is set up MTD-compatible software properly, connect it to the rest of your systems, and automate the quoting, invoicing and chasing that sits around it, so the compliance side becomes routine rather than a recurring scramble. Guide prices for invoice and quote automation start from £750; see pricing for the full range.

If you'd rather not do this yourself

We set up and connect accounting software like Xero or QuickBooks properly, and automate the admin that builds up around it, so your records stay current without extra effort each month. Have a look at our automation service, or tell us what software you're currently using and we'll suggest the right setup on a free call.