The finance team's guide to choosing Making Tax Digital software

Choosing Making Tax Digital (MTD) software should be straightforward. You find a product on HMRC's list, buy it, and submit returns. Sounds easy, right? In practice, however, "MTD-compatible" in vendor marketing can cover anything from full submission support to a basic bridging tool.

A Wolters Kluwer survey of 100 UK accountants found that half said choosing the right software was their biggest MTD challenge. If professional advisers find this difficult, finance teams making the same decision alongside everything else they handle are unlikely to find it easier.

This guide covers what MTD software must functionally do and how to verify a product is genuinely recognised by HMRC. It also walks through the evaluation criteria that matter most for a multi-system finance environment. This is general guidance for UK finance teams, not tax advice, so consult a qualified tax adviser before acting on the rules discussed here.

Which MTD obligations apply to your business

MTD for VAT has been fully mandatory since 1 April 2022 for all VAT-registered businesses regardless of turnover. Over 30 million VAT returns have been processed through the system since launch, according to HMRC's annual report.

If you run an unincorporated business as a sole trader or landlord, MTD for Income Tax Self Assessment (ITSA) may also apply. The ITSA threshold timeline phases in based on gross qualifying income: over £50,000 from 6 April 2026, over £30,000 from April 2027, and over £20,000 from April 2028. Limited companies aren't in scope. Plans for MTD for Corporation Tax have been abandoned entirely, confirmed in HMRC's Transformation Roadmap.

If you manage a limited company, your only MTD obligation today is MTD for VAT. The software you choose should match the obligations that apply to your business structure, so you don't pay for capabilities you won't use. The same care matters when reclaiming UK VAT: accurate digital records are the foundation of both compliance and recovery.

What your MTD software must functionally do

Three core functions are required of MTD software. Some listed products support only one or two. Your software should cover all three functions required for the obligations that apply to you.

Digital record-keeping

Digital records must capture and maintain transaction amounts and dates, along with the required VAT data, for all relevant transactions. Paper records or spreadsheets with manually typed entries don't satisfy this requirement on their own. The same applies to VAT receipts and supporting documentation: HMRC's digital records standard extends beyond line totals to include traceable supporting evidence. For mid-market teams running multiple systems, this is often where the first compliance gap appears.

Quarterly updates

Under MTD for ITSA, you submit quarterly updates of income and expenses to HMRC as unadjusted summaries, not full tax returns. Quarterly updates are cumulative: each submission is a year-to-date snapshot that incorporates and supersedes the previous quarter's figures, so errors can be corrected in the next update without resubmitting earlier quarters. This differs from the VAT model and can catch teams off guard when they're using bridging software that doesn't handle cumulative submissions automatically.

Final declaration

After the fourth quarterly update, you submit a final declaration, the MTD equivalent of the tax return. All four quarterly updates must be filed before you can complete this step. HMRC's software choices tool was updated in November 2025 to include features described as "in development", meaning capabilities that providers have committed to build but may not yet support at the point of purchase. Verify current feature status against your obligations before signing a contract.

If your chosen product handles quarterly updates but not the final declaration, you'll need a second tool for that step. That adds complexity and another software handoff.

What's at stake when MTD compliance breaks down

Late submissions and late payments each carry their own penalty rules. The submission side is points-based. The payment side is percentage-based.

For quarterly filers, you accumulate one penalty point per missed deadline. At four points, you could face a £200 penalty, with another £200 for each subsequent miss. Points below the threshold are removed automatically after 24 months, but once you hit the threshold, removal requires submitting all outstanding returns and demonstrating sustained compliance for the next 12 months.

Late payment penalties run separately. No penalty applies for the first 15 days after a deadline. After that, charges start at 3% and escalate, with a daily rate of 10% per annum from day 31.

The Autumn Budget 2025 confirmed a soft landing for Phase 1 joiners. No penalty points apply for late quarterly updates during the first four submissions for those mandated from April 2026, though the filing obligation itself stays in place. Knowing where your business currently sits on the points scale, and how close you are to the threshold, matters when you're choosing a tool that has to handle every deadline cleanly.

Full accounting software or bridging software: Which do you need?

If you've already invested time setting up your accounting stack, the last thing you want is to find out that your MTD tool requires you to rethink the whole data flow. For teams running established systems, this is often the most confusing decision. How much manual handoff is in your current data flow today? Understanding the difference between a full accounting platform and a bridging tool determines whether you're adding a lightweight layer to your stack or rethinking how data flows through it entirely.

The two categories address MTD compliance from different starting points:

Digital link rules permit the bridging approach under VAT Notice 700/22, but with a strict condition. Every transfer between your source system and the bridging tool must use a digital link. A spreadsheet whose cells contain manually typed values drawn from another system doesn't qualify as compliant, even if the onward submission to HMRC is API-enabled.

For most mid-market finance teams, the priority is whether the data moving into your accounting software from your other systems keeps an unbroken digital link. You should be able to trace every number on your VAT return back to its source without a manual handoff along the way.

How to evaluate MTD software for a multi-system finance team

Mid-market finance teams need software that fits the systems and controls already in place. Basic legal compatibility is the floor, not the criterion. Providers vary widely in capability and integration depth. Your evaluation should test against five dimensions.

HMRC API compatibility and future compliance readiness

Confirm the product appears on HMRC's MTD software finder. Products listed in the "in development" section may not yet support all features, so verify current status before purchase. Check explicitly which submission types the product covers, since VAT returns, quarterly income tax updates, End of Period Statements, and Final Declarations may not all be included in a single licence.

Digital links across your entire data flow

Where you use more than one piece of software, every transfer of data between them must be automated. API connections, formula-linked spreadsheet cells, and automated file imports all qualify. Copying and pasting, manually retyping, or noting figures from one screen and entering them in another don't. VAT Notice 700/22 is explicit on this point.

For most mid-market teams, the digital link breach hides in plain sight. Three or four source systems, a consolidation spreadsheet, and a single copy-paste step between them when month-end approaches. That single break is enough to make the entire chain non-compliant, even if the onward submission to HMRC is fully API-enabled.

For sales data, the digital link requirement starts from the point where data is first held in functional compatible software, typically the sales or purchase ledger, and runs through to the HMRC submission. For purchase data, the digital link requirement applies across the software systems that make up your VAT records.

For finance teams running multiple source systems, the question is whether your spend capture itself is digital from the start. Spendesk is an all-in-one spend management platform consolidating company cards, expense management, accounts payable, procurement, and budgeting. Tools like Spendesk create the clean, digital audit trail that MTD requires, with purchase orders, approved invoices, and payment records captured at source rather than reconstructed at month-end. That removes one of the most common digital-link breach points in mid-market finance stacks.

ERP and accounting system integration

Your MTD tool needs to connect natively with your existing ERP (enterprise resource planning) and accounting platform. A standalone submission tool that requires manual export and re-import creates the exact digital link breach the rules are designed to prevent.

Multi-user access and role-based permissions

Mid-market finance functions involve preparers, reviewers, approvers, and external advisers who all need concurrent access. Software that restricts user numbers or lacks differentiated permissions creates governance gaps in your approval workflows. Check whether your licence tier allows your full set of concurrent users, including your external tax adviser, so you don't discover access limitations during a time-sensitive filing window.

Complex VAT scenario handling

If your business deals with reverse charge transactions, partial exemption calculations, or retail schemes, test the software against your actual transaction profile rather than standard demo data. Each of these has scheme-specific MTD rules. Some require digital records of individual transactions; others permit daily totals or allow additional records to be kept outside the digital chain. Software handling of these scenarios varies significantly.

Evaluating software across all these dimensions takes time, and it's rarely a one-person job. The cost of getting it wrong, especially when you discover a digital link breach at audit or need to migrate mid-cycle, is significantly higher than the upfront effort.

How to verify your software is genuinely HMRC-recognised

Start with HMRC's MTD software finder, then check whether the product matches your business size and requirements as well as HMRC's technical standard.

If your existing Making Tax Digital for VAT software is already HMRC-recognised, check whether that same product also covers MTD for Income Tax if that's relevant to your situation. It's worth checking your software against HMRC's current register rather than relying on a vendor claim from the original purchase.

For an additional layer of independent technical assessment, products in the ICAEW Technology Accreditation scheme are independently evaluated by RSM. While ICAEW doesn't recommend individual products, the accreditation goes beyond HMRC's minimum standard and is worth requesting during vendor evaluation.

Choosing software that protects your compliance flow

The problem with vague "MTD-compatible" claims is that they can hide the difference between software that supports your full obligation and software that only covers one step. The gap highlighted at the start of this guide comes down to whether your software supports the right obligations and preserves digital records from the original transaction through to submission. HMRC recognition is the starting point, not the whole decision. Your finance team also needs to move from source data to filing without manual rekeying or missing features.

Cleaner data capture upstream reduces the risk that MTD compliance breaks down before the submission stage. Spendesk creates this kind of digital audit trail by default, with company-card transactions, approved invoices, and payment records captured at source and pushed into your accounting software via API. For teams assessing upstream controls, see how Spendesk handles AP automation.

Before you commit to any product, map your current data flow from source to submission. List the exact MTD obligations that apply to your business. Then ask each vendor to show how their software handles those steps in the version you're actually buying. That turns a vague compatibility claim into a workflow you can test, which is the safest answer to the opening problem of trusting a marketing label.

Frequently asked questions about Making Tax Digital software

What is Making Tax Digital software?

Making Tax Digital software is HMRC-recognised technology that lets you keep digital records of business transactions, maintain digital links between source systems and your accounting platform, and submit returns to HMRC via API. Full accounting software covers all three functions within a single platform. Bridging software handles only the submission step, connecting an existing system like a spreadsheet to HMRC.

Can I use free software for Making Tax Digital?

Some HMRC-recognised MTD software is available at no cost, but free tiers typically limit the number of submissions, users, or integrations. If your finance team needs multi-user access, API connections to an ERP or accounting platform, or support for complex VAT schemes, a paid tier is likely necessary. Check the specific feature set against your requirements before committing.

What happens if my MTD software provider is removed from HMRC's register?

Products listed in the "in development" section of HMRC's software finder may not yet support all features, and recognition can change over time. If your provider loses its HMRC recognition, your submissions through that tool wouldn't be valid, and you'd need to migrate to a different recognised product. HMRC only receives quarterly totals, not underlying transactions, so your new provider wouldn't have access to your full transaction history under ICAEW's MTD record-keeping rules. Maintain a data retention strategy independent of any single platform, and verify your provider's current status on the HMRC register before each quarterly submission deadline.

What records should you keep if you switch MTD software?

If you change provider, make sure your historical digital records, filing confirmations, and supporting transaction data remain accessible outside the old platform. A provider change can solve a feature or compliance gap, but it shouldn't leave your finance team without the records needed to trace prior submissions. Export everything you may need to reference before the migration cycle starts, not after.

Does HMRC recognition guarantee the software fits your workflow?

No. HMRC recognition shows that the product meets HMRC's technical standard. It doesn't guarantee that the software supports every submission type you need, or that it will preserve digital links across your wider finance stack. Recognition is a starting point, not the whole decision.