What Software Can I Use for Making Tax Digital VAT Returns

Making Tax Digital (MTD) has changed the way businesses file VAT returns in the UK. Instead of manually entering figures into HMRC’s portal, VAT-registered businesses must now use approved software to record transactions and submit returns digitally. The right MTD-compatible software can make VAT compliance simpler, faster, and more accurate. This article explains what software you can use for Making Tax Digital VAT returns, how it connects to HMRC, and what features to consider before choosing a provider.

Making Tax Digital for VAT is part of HMRC’s initiative to modernise tax reporting. It requires VAT-registered businesses to:

  • Keep digital records of all VAT transactions.

  • Use software that can connect directly to HMRC’s systems via an API (Application Programming Interface).

  • Submit VAT returns digitally instead of using the old online form.

As of April 2022, all VAT-registered businesses, including those below the VAT threshold, must comply with MTD rules unless they have been granted an exemption.

What MTD-Compatible Software Does

MTD-compatible software allows you to:

  • Record sales, purchases, and VAT amounts digitally.

  • Calculate VAT owed or reclaimable automatically.

  • Submit VAT returns directly to HMRC without re-entering figures manually.

  • Maintain digital links between records to comply with MTD requirements.

This software replaces paper-based or manual systems, reducing the risk of errors and making it easier to manage VAT compliance.

Types of Software You Can Use for MTD VAT Returns

There are two main types of software you can use to comply with MTD:

1. Accounting Software
Most modern accounting software packages are fully MTD-compliant. They record transactions, calculate VAT, and send returns directly to HMRC.

Popular examples include:

  • QuickBooks Online: Ideal for small and medium businesses. It manages invoicing, expenses, and VAT submissions in one place.

  • Xero: A cloud-based platform with automatic VAT calculation, reporting, and HMRC submission features.

  • FreeAgent: Designed for freelancers and small businesses, offering simple VAT tracking and real-time tax insights.

  • Sage Accounting: Suitable for all business sizes, offering full MTD integration and detailed reporting.

  • Zoho Books: A cost-effective option with MTD compliance, automation, and easy expense tracking.

2. Bridging Software
If you currently use spreadsheets to manage VAT records, bridging software allows you to remain compliant without switching to full accounting software. It creates a digital link between your spreadsheet and HMRC’s system so you can submit VAT returns electronically.

Popular bridging software options include:

  • TaxCalc VAT Filer: Imports data from Excel and submits VAT returns digitally.

  • VitalTax: A plug-in for Microsoft Excel that allows you to file VAT returns directly from your spreadsheet.

  • BTCSoftware VAT Filer: Provides simple bridging for small businesses still using manual systems.

Choosing Between Accounting and Bridging Software

The choice between accounting software and bridging software depends on how your business currently manages VAT records.

  • Choose accounting software if you want a full solution that handles bookkeeping, VAT calculations, and reporting automatically. This is best for growing businesses or those managing multiple income streams.

  • Choose bridging software if you already maintain accurate spreadsheets and want to continue using them while meeting MTD submission requirements. This is often suitable for smaller businesses or those with simple VAT needs.

Many businesses eventually move from bridging software to full accounting software once they see the benefits of automation and time savings.

Key Features to Look For in MTD Software

When selecting software for Making Tax Digital VAT returns, look for these essential features:

  • HMRC approval: Check that the software appears on HMRC’s official list of MTD-compatible products.

  • Digital record keeping: Ensure it can store invoices, receipts, and VAT records in a digital format.

  • VAT automation: Automatic VAT calculation reduces the risk of human error.

  • Direct HMRC link: The software must connect securely to HMRC’s systems for filing returns.

  • Reporting tools: Look for options that provide detailed VAT summaries and error checks before submission.

  • Multi-user access: If you have an accountant or bookkeeper, make sure they can access the software too.

  • Scalability: Choose software that can handle future growth or multiple VAT-registered entities if needed.

How to Submit VAT Returns Using MTD Software

Submitting your VAT return digitally is straightforward once your software is connected to HMRC. The typical process involves:

  1. Entering or importing your sales and purchase data into the software.

  2. Reviewing the automatically calculated VAT figures.

  3. Selecting the VAT return period you are filing for.

  4. Authorising the software to connect to HMRC through your Government Gateway account.

  5. Submitting the return directly from the software.

Once submitted, you will receive a confirmation notice both from HMRC and within your software dashboard.

Making Tax Digital and Cloud-Based Accounting

Cloud-based accounting software has become the most popular choice for MTD compliance. It allows you to:

  • Access your accounts from any device.

  • Automatically back up your financial data.

  • Integrate bank feeds for real-time reconciliation.

  • Collaborate easily with accountants or staff remotely.

Cloud systems also update automatically when HMRC makes regulatory changes, ensuring continued compliance without manual updates.

Costs of MTD Software

Costs vary depending on the software’s features and business size. As a general guide:

  • Cloud accounting software typically costs between £10 and £40 per month.

  • Bridging software can range from free basic tools to around £100 per year.

Many software providers offer free trials, allowing you to test their systems before committing to a subscription.

How an Accountant Can Help with MTD Software

An accountant can play a key role in helping you set up and manage MTD-compliant software. They can:

  • Recommend the best software for your business.

  • Set up digital links between your records and HMRC.

  • Review your VAT data before submission.

  • Ensure you remain compliant with MTD and other VAT regulations.

Using an accountant not only ensures compliance but also saves time and reduces the likelihood of errors that could lead to penalties.

Common Mistakes to Avoid

Even with the right software, businesses sometimes make errors that can cause issues with HMRC. Avoid:

  • Using non-approved software that cannot connect to HMRC’s API.

  • Entering data manually without proper digital links.

  • Missing VAT submission deadlines.

  • Ignoring MTD updates or software notifications.

Regular reviews and reconciliations will help you stay on top of your VAT obligations.

Summary

To comply with Making Tax Digital, you must use HMRC-approved software to record transactions and submit VAT returns digitally. You can choose between full accounting software such as QuickBooks, Xero, and Sage, or bridging software that links your spreadsheets to HMRC.

When selecting software, prioritise HMRC approval, ease of use, automation, and accurate VAT calculations. Cloud-based systems offer additional flexibility and security for most businesses.

Setting up the right MTD software now ensures smooth VAT submissions, saves time, and keeps your business compliant with HMRC’s digital requirements.