If your business needs to comply with Making Tax Digital, you need accounting software that HMRC recognises as compatible. Not all accounting software meets the requirements, and simply being modern or cloud-based is not enough. This guide explains what MTD compatibility means and what to look for when choosing software for compliance.
What Does MTD-Compatible Mean?
MTD-compatible software is software that has been assessed by HMRC and confirmed as meeting the technical requirements of Making Tax Digital. This means the software can:
- Store the required digital records in the format HMRC requires
- Communicate with HMRC’s systems through the MTD API
- Submit returns directly to HMRC without manual re-keying
- Maintain the digital link required between your records and the submission
HMRC publishes and maintains an approved software list on gov.uk. This is the definitive reference, not a vendor’s marketing claims.
MTD for VAT vs MTD for Income Tax: Different Compatibility Requirements
There are different MTD requirements for different taxes, and software may be compatible with one but not the other.
MTD for VAT: The software must be able to keep digital VAT records and submit VAT returns through the MTD API. This is the most widely implemented MTD requirement and most mainstream accounting packages support it.
MTD for Income Tax: The software must support quarterly updates, the end-of-period statement, and the final declaration. This is newer, and not all software that supports MTD for VAT has yet added full Income Tax support. Check explicitly.
When reviewing the HMRC-approved software list, check that the software is listed for the specific tax that applies to you. Do not assume that VAT compatibility implies Income Tax compatibility.
What to Look for Beyond Basic Compatibility
Once you have confirmed a software package is on the HMRC-approved list, there are further practical considerations:
Ease of MTD submissions: Some software makes the process of reviewing and submitting returns very straightforward. Others are more complex. If you are managing your own accounts, ease of use for this specific task matters.
Authorisation setup: To submit through MTD, your software needs to be authorised to connect to your Government Gateway account. This is usually a one-time setup process. Check that the authorisation process is well documented and not technically complex.
Handling of adjustments: VAT returns sometimes require adjustments, for example if you need to correct a previous error or account for partial exemption. Check that the software handles the types of adjustments relevant to your business.
Agent access: If your accountant submits on your behalf, they will need agent software that is also MTD-compatible and connected to their agent Government Gateway account. Confirm the setup works for how you and your accountant collaborate.
Bridging Software as an Alternative
If you prefer to keep your records in a spreadsheet, bridging software can provide the digital link between your spreadsheet data and HMRC’s MTD API. Bridging tools are listed on the HMRC-approved software list alongside full accounting packages.
Bridging is a legitimate option for MTD for VAT, but it has limitations. It works by reading VAT figures from your spreadsheet in a specific format and submitting them to HMRC. The digital link requirement means the figures must flow digitally from the spreadsheet to the bridging tool without manual re-keying.
For MTD for Income Tax, bridging software options are more limited, and the quarterly submission requirements make a spreadsheet-plus-bridging approach less practical than it is for VAT.
Free and Low-Cost Options
MTD-compatible software does not have to be expensive. There are free and low-cost options on the HMRC-approved list, including some basic packages suitable for sole traders with simple records. These may lack features like bank feeds, advanced reporting, or payroll, but they meet the core MTD compliance requirement.
If cost is a primary concern, check the HMRC-approved list for free options before assuming you need to pay for a premium package.
Checking Your Current Software
If you are already using accounting software and want to confirm it is MTD-compatible, the simplest check is to search the HMRC-approved software list on gov.uk by product name. The list shows which taxes each product supports.
You can also check within your software. MTD-compatible packages typically have a specific section for MTD settings and authorisation, and will show whether your Government Gateway connection is active.
What Happens If Your Software Loses Compatibility?
HMRC can remove software from the approved list if it no longer meets requirements. If you receive any notification from HMRC or your software provider about compatibility issues, act promptly. Using non-compliant software for mandatory submissions creates a compliance risk.
For the broader context of what Making Tax Digital requires, see our guide on What Is Making Tax Digital. For a full checklist of your MTD readiness, see our guide on Is My Business Ready for Making Tax Digital. For guidance on choosing software that fits your business overall, see our guide on how to choose accounting software for your UK small business.
