How to choose Making Tax Digital software
It’s been six months since Making Tax Digital for Income Tax went live, and choosing software is now essential for many people
The introduction of Making Tax Digital represents one of the most seismic changes ever made to the UK’s tax system.
The time-honoured self-assessment tax returns and shoeboxes full of receipts have been swept away by an online system of digital record keeping and quarterly updates.
Initially, MTD only applies to sole traders and landlords with turnover above £50,000, but more people will be ensnared in its widening dragnet each year.
Qualifying individuals will be legally required to adopt a new digital method of filing tax information and recording financial transactions through a bookkeeping or accounting app.
What does Making Tax Digital software do?
To qualify as MTD compatible software, any tool or platform must be capable of three things:
- Creating and saving digital records
- Sending quarterly updates to HMRC
- Submitting annual tax returns.
Disappointingly, HMRC have decided not to offer their own proprietary software, despite being ideally placed to help consumers navigate the UK’s absurdly complex tax system.
Instead, they’ve allowed third-party software providers to service this newly created market, belatedly blocking newer submissions because of quality concerns.
There is little evidence that HMRC have rigorously stress-tested each approved tool, which won’t help consumers select a provider with confidence.
With numerous providers, and numerous unanswered questions surrounding this deeply flawed programme, how should you choose Making Tax Digital software?
A brief market overview
To date, 144 companies have launched Making Tax Digital software.
In their MTD campaign literature, HMRC claim there are free and paid software options on the market.
However, closer inspection reveals free platforms are either very basic, only suitable in specific circumstances, freemium or only free for an introductory period.
To add further confusion, there is also an option for bridging software, which connects existing spreadsheets (like Microsoft Excel) directly to HMRC, though it may not be able to deal with year-end tax returns.
VAT-registered businesses and individuals will already be using digital record-keeping software to submit VAT returns. Some tools are already MTD compatible, but others aren’t.
The only people likely to be granted an MTD exemption are those who are digitally excluded due to disabilities or a lack of connectivity at home, or those who meet a prescribed list of conditions, such as not having an NI number.
How to choose a platform
Our first recommendation is to ignore any ‘free’ MTD software.
From VPNs which record user logs through to social media platforms that voraciously harvest and endlessly resell user data, free online software always comes at a cost one way or another.
Our next piece of advice is to decide whether you’d rather use cloud-hosted or desktop software.
The former is more regularly updated to offer the latest features, whereas the latter is more secure as it’s installed onto your device and works offline.
Most MTD tools are cloud-based (though not all of them), while Mac users may find some desktop platforms are incompatible with OS X.
HMRC disingenuously point out that “some apps highlight errors and send reminders”, which betrays the fact other tools don’t perform these basic services.
The HMRC website contains a software finding tool which allows you to search based on a questionnaire or a filtered list. You can also check if your existing software is compatible.
While we wouldn’t necessarily choose MTD software based on this tool’s recommendations, it could be useful in producing a shortlist.
Our final piece of advice is to favour well-established software companies.
If an MTD software platform goes bust, your entire filing history could be wiped from history overnight.
HMRC has provided no clarity about liability in this scenario, but given their abysmal customer service of late, they’re unlikely to offer much support or assistance.
One-touch switching has revolutionised migration between ISPs, but there is no such scheme for customers to leave an MTD provider they no longer wish to use.
Before signing up to a chosen platform, be confident you’ll be happy to stay with them long-term – and that they’re likely to remain in business…
