The phasing in of the government’s ambitious Making Tax Digital scheme has already begun, with VAT-registered businesses already obliged to submit their VAT returns via MTD-compatible software. Even if that doesn’t apply to your business right now, there are many good reasons to start using small business accounting software sooner rather than later.
Accounting software – our top three picks
First of all, we've picked our top three accounting software products for small businesses - click the links below to visit their sites and find out more.
Ember
Run your business, Ember takes care of the rest
- Automated filing
- Tax optimisations
- Easy invoicing
FreshBooks
Affordable accounting for UK small businesses
- Recurring billing
- Client retainers
- Real-time reports
Zoho Books
Online accounting software, built for your business
- End-to-end accounting
- VAT compliance
- Integrated platform
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What does Making Tax Digital mean for me?
Making Tax Digital (MTD) is an initiative being brought in by the government meaning that businesses, the self-employed and landlords will need to keep accounting records digitally and submit tax returns via MTD-compatible software.
Currently, it’s only compulsory for businesses that are VAT-registered with a taxable turnover over the VAT threshold of £85,000 to keep records digitally and submit their VAT returns via Making Tax Digital VAT software but it will be being phased in for all businesses over the next two to three years. This means two things:
- All businesses will have to keep digital accounting records.
- Eventually, all tax reporting on HMRC will be completely digital and you will need to connect or upload compatible files.
Why do you need Making Tax Digital compatible software?
Making Tax Digital will mean that if you’re using spreadsheets they must have an API and where you’re using more than one bit of software they must be digitally linked and connect to HMRC for submissions.
Even if you aren’t legally obliged to do it yet, making the move to using accounting software will mean that you’re ready and it will make it easier for you to manage your businesses finances and accounting activities like:
- Bookkeeping
- Invoicing
- Estimates/quotes
- Expenses
- Inventory
- Payroll
- Tracking cash flow and profit/loss
- Generating real-time reports
- Creating budgets and forecasts
- Sharing data with team members and accountants
- Submitting digital tax returns
Along with being ready to go with submitting your tax returns to HMRC digitally when the time comes, there are other benefits of implementing MTD-compatible software sooner rather than later:
- It’s a more efficient and effective way of tracking income and expenditure.
- You’ll have a better hold on your finances and can make better-informed plans.
- It makes it easier to calculate your tax correctly.
- You’re less likely to miss deadlines or be in a rush to sort things at the last minute.
- It will be quicker to do your accounts with automated functionality like receipt scanning.
- It can help reduce late payments with automated follow-ups and reminders.
- You’ll need less storage of paper records, invoices, and receipts.
How to choose the best Making Tax Digital software provider?
Accounting software used to be clunky and complicated to use but it has come on leaps and bounds in recent years. There are many providers who have designed software that’s specifically for the self-employed and small businesses. The options are plentiful and cheap (or even free) to use. You just need to decide which provider best meets all your business needs.
The sort of questions you should be asking yourself are:
- How many users will I need?
- What tasks do I want it to perform?
- Do I need my accountant to be connected?
- What add-on services and third-party integrations might be helpful?
- What is my budget?
Have a discussion with your accountant and get their advice before you make a decision.
Making Tax Digital software providers
Here you’ll find an overview of some of the main MTD software providers.
|
Sage |
Quickbooks |
Wave |
Xero |
|
|
Best for… |
Online payments, invoicing, tracking and forecasting. |
Invoicing, expenses, connecting your accountant. |
Free accounts tracking, invoicing and expenses for entrepreneurs. |
Bank reconciliation and inventory. |
|
Cost |
Starts at £10 a month. |
Starts at £8 a month. |
Most services are free. |
Starts at £10 a month. |
|
MTD compliant? |
Yes |
Yes |
Uses bridging software |
Yes |
|
Introductory offer? |
30-day free trial and save 40% for the first 3 months. |
Less than half price for the first 6 months. |
N/A |
30-day free trial. |
|
Support? |
24/7 phone and email support. |
24/7 free online. |
Email support. |
24/7 free online. |
|
Subscription or PAYG? |
Subscription |
Subscription |
Free but additional services like online payments are pay-as-you-go. |
Subscription |
|
Cloud or desktop? |
Both |
Both |
Cloud |
Both |
|
Additional features |
Payroll solutions, online payments, advanced fraud protection. |
SmartScan technology checks for common errors on VAT returns. |
Payroll and payments. |
Specially tailored features for different industries and the ability to add more apps for added functionality. |
And, some more providers here…
|
FreeAgent |
Clear Books |
Zoho Books |
Simplifi |
|
|
Best for… |
Expenses, invoicing, cash-flow and tax forecasts for small businesses and freelancers. |
Micro is a free package to track sales and bills. Upgrade for more features. |
End-to-end tools for daily accounting needs. |
Designed for freelancers to create and send invoices fast and get receipts from phone photos. |
|
Cost |
From £9.50 a month. |
Free or from £10 a month. |
Starts at £6 a month. |
£12.99 a month. |
|
MTD compatible and compliant? |
Yes |
Yes (Clear Books Large) |
Yes |
Yes |
|
Introductory offer? |
30 days free and 50% off your first 6 months. |
The Micro package is free or there’s a 30-day free trial. |
14-day free trial and 2 month discount for annual payments. |
33-day free trial. |
|
Support? |
Phone and email support 9-5, Mon-Fri. |
Phone and email support 9-5, Mon-Fri. |
24/5 free online support. |
Email support. |
|
Subscription or PAYG? |
Subscription |
Subscription |
Subscription |
Subscription |
|
Cloud or desktop? |
Cloud |
Cloud |
Cloud |
Cloud |
Is the software MTD compatible and compliant?
Check the table above for the software providers featured. Most accounting software providers have dedicated website pages or FAQs sections on their compatibility so make sure you have a read of this section.
What is cloud accounting?
Cloud accounting software is internet-based meaning that you can access and use it wherever you are via any device (Mac and PC and it’s mobile-friendly). Desktop accounting systems just sit on one computer (or however many computers you buy the licence for).
What is bridging software?
Currently, MTD states that your accounting software doesn’t need to connect directly to HMRC to submit VAT100 data. If you use software that doesn’t directly connect you can export data (normally via a spreadsheet) into bridging software that has the compatibility to upload directly to HMRC.
This might be helpful for you if you already use accounting software that isn’t MTD compatible yet or if you’re considering a provider that doesn’t have a direct connection yet.
Bridging software providers that offer simple solutions include VitalTax (first year free then £1 per month per business) and TaxOptimiser (the basic package is free for the first year then £30 annually).
You can search for MTD compatible software and bridging software providers via the GOV.UK website.
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