Cloud accounting software adopters are more likely to experience the benefits of Making Tax Digital (MTD) for VAT than those using only bridging software, a new study has revealed.
The research, published by HM Revenue & Customs (HMRC), comes ahead of the extended rollout of the new digital tax regime.
The survey of small businesses (fewer than 30 employees and an annual revenue of less than £10 million) suggests that firms using fully compatible software – such as Xero, QuickBooks, or Sage – typically experienced “ongoing benefits that outweighed the costs”.
The benefits included reduced scope for error, time savings, increased VAT confidence, and greater financial confidence, insight, and control.
Those using bridging software, meanwhile, reported little to no benefits of using MTD for VAT.
MTD bridging software is defined as a solution that connects non-compatible software, such as Excel spreadsheets, to HMRC’s propriety systems. It is typically limited in features outside of its primary purpose.
Compatible software, however, has enhanced capabilities to enrich the lives of business owners. This includes features such as automation, cloud-based storage for improved collaboration across stakeholders, accuracy checking, performance reports, and facilities that scale as your business grows or expands into new sectors.
Why does this matter?
The study comes ahead of the next stage of MTD.
From 1 April 2022, MTD for VAT will become mandatory for all VAT-registered businesses, rather than just those earning above the VAT threshold (currently £85,000).
MTD for Income Tax, meanwhile, will be introduced one year later than planned in April 2024.
Commenting on the impact of the regime, experts from the Institute of Chartered Accountants in England and Wales (ICAEW) said: “Software for MTD income tax self assessment (MTD ITSA) will be considerably more complex and will involve more two-way exchange of information with HMRC systems and the choice between fully functional and bridging products could be even more critical.”
They added: “In some cases, the best option for MTD may be to adopt an inexpensive solution in the short term that ensures a business is compliant. In the medium to longer term, the organisation could then reconsider the options as part of an overall review of business systems and processes at a suitable opportunity, so that any solution is based first and foremost on the needs of the business.”
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