Making Tax Digital (MTD) is asking businesses and individuals to interact with HMRC digitally. As well as having a digital tax account, customers will use digital record keeping software that is linked directly to HMRC systems. This will allow them to send and receive information directly from their software.

Recent consultations on MTD highlighted as few areas of concern with regard to employing digital technologies, including:

  • Pace of change
  • Capability of the smallest businesses and those who struggle with digital technology to adapt
  • Burdens on businesses
  • Agents’ ability to access digital services to support their clients
  • Data security when using third party software

Transferring information digitally will mean that HMRC will collect and process information as close to real time as possible. As well as helping to prevent errors, real-time processing will mean no longer having to wait till the end of the year to find out how much tax is owed.

What are HMRC’s software requirements?

  • HMRC expects that software will be fully linked with HMRC’s digital tax account.
  • Software is expected be able to recognise scanned documents and automate accounting entries.
  • Evidence of trading transactions will be kept digitally as far as possible. Invoices and receipts, for example, could be uploaded using smartphone cameras.
  • Software should categorise income and expense and make some automatic tax adjustments to accounting profits.
  • Software may even have built-in prompts to alert the taxpayer to reliefs or allowances.
  • Spreadsheets (such as Excel) can be used in conjunction with other software.

N.B. HMRC will not be providing its own free software, but will be setting out minimum security specifications and standards.

So which software should you use?

The software you choose for keeping your records should have internet connectivity. Cloud-based accounting software can be accessed from anywhere, on any device and the data is real-time, so you always have access to the latest version of your accounts.

It is expected that Xero will be MTD compliant. As well as being one of the most user-friendly cloud accounting packages, you can perform bank reconciliation easily by linking it to your online banking.

We are still waiting for more information from HMRC on specifics and we will be covering how the different software suppliers deal with the new requirements as soon as we know more, so watch this space.

For more information on Xero, click here. For help with Xero, get in touch here.