One of the biggest changes under Making Tax Digital for Income Tax (MTD for ITSA) is the requirement to use compatible software. Paper records and manual tax returns are gradually being replaced with digital record keeping and online submissions.
But what exactly is MTD-compatible software, and what does it need to do?
What is MTD-compatible software?
MTD-compatible software is software that can:
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Keep digital business records
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Maintain records in the correct format
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Connect directly to HMRC systems
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Submit quarterly updates
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Submit end-of-year declarations
HMRC requires taxpayers within MTD for ITSA to maintain digital records and submit information electronically using approved software.
This software can range from:
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Full cloud accounting platforms
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Spreadsheet bridging software
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Mobile bookkeeping apps
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Sole trader-focused tax apps
Why does HMRC require software?
The government’s goal is to reduce errors and modernise the tax system. HMRC believes digital records and more regular reporting will improve accuracy and help businesses better understand their tax position throughout the year.
The move is also designed to reduce reliance on paper records and manual calculations.
What features should businesses look for?
Not all software is the same. Businesses should look for:
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HMRC recognition for MTD compliance
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Bank feeds and transaction imports
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Expense categorisation
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Invoice creation
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Receipt capture
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Quarterly submission functionality
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End-of-year filing support
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Accountant access
Some businesses may only need simple software, while others may benefit from more advanced bookkeeping and reporting tools.
There are generally two approaches: Cloud Accounting or Bridging Software
Cloud accounting software: Platforms such as Xero, QuickBooks, FreeAgent and Sage offer full bookkeeping systems with bank feeds, invoicing and reporting.
Bridging software: Some businesses still prefer spreadsheets. Bridging software allows spreadsheets to connect to HMRC’s systems while meeting MTD requirements. For many small businesses, cloud software offers better automation and less manual work over time.
Do businesses need to change their existing processes?
Usually, yes.
MTD requires:
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Digital records
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Digital links between systems
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More regular bookkeeping
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Quarterly reporting
Businesses that currently update their accounts once a year may need to move to more frequent bookkeeping habits.
What information must be recorded?
Businesses generally need to digitally record:
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Income
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Expenses
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Dates of transactions
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Categories of expenditure
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Property income details where relevant
The quality of records matters because quarterly updates are based on this information.
Can accountants access the software?
Yes. Most modern cloud accounting systems allow accountants or bookkeepers to access records directly. This can improve collaboration and reduce year-end admin.
Many accountants are encouraging clients to move to software now so there is time to learn the system before deadlines become critical.
How to choose the right software
The best software depends on:
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Business size
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Number of transactions
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Whether VAT is registered
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Whether invoices are raised
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Property income complexity
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Existing bookkeeping knowledge
It is often worth discussing options with your accountant before choosing.
Choosing the right software is key
MTD-compatible software is at the centre of the new tax system. While the transition may initially feel like extra work, many businesses eventually find that digital bookkeeping improves visibility, organisation and efficiency. The key is choosing software that matches the needs of the business and starting early enough to become comfortable using it before deadlines arrive.
If you’re unsure which software will best suit your needs, our MTD for ITSA service will take care of that for you. Our team of experts will ensure you’re set up and ready well in advance of the first submission deadline due August 2026. Find out more here. Find out more here.
