Tax Talk: MTD for ITSA – a look ahead to software
Whether it is API enabled or bridging software for spreadsheets, providers are all jumping on the bandwagon to offer you their wares. But take care to choose what best suits your business.
As a quick recap, from April 2024 MTD for ITSA (Making Tax Digital for Income Tax Self Assessment) will require four quarterly returns, an end of period statement to confirm the business details for the year, and a final declaration akin to a current tax return.
As MTD for ITSA approaches, the recommendation is increasingly clear. Start keeping your records digitally as soon as you can.
But what is not as clear is what kind of software you should be using for the best experience. With so many providers rushing to put out their version, it can be overwhelming to look through the HMRC list of compatible software and choose which is best for your needs.
Note that HMRC does not provide its own software and, unlike with current tax returns, you will not be able to file online using an HMRC portal. To comply with MTD, you’ll need to either choose a compatible software, or have an agent do this on your behalf.
Some software options are clearly geared towards certain kinds of businesses. But there are a few underlying types of software, and which is best for you depends on your circumstances.
What is API enabled software?
These are software packages that act as a one-stop shop for MTD. They can both hold digital records, and file with HMRC directly using HMRC’s API (application programming interface). Many will be geared to a particular type of customer, for example landlords, and will offer additional services by using the data provided.
If you can link your income and expenses to the software, for example by using a compatible business account, this will typically allow you to file direct with HMRC or export your data to send to your accountant and the use of API software is therefore likely to reduce compliance work in the future. If using an API solution it is important to choose the right software for your current business need and future plans for the business.
What is bridging software for spreadsheets?
Some providers are aiming to make software that bridges the gap between existing spreadsheets and HMRC’s new API. By doing so, you can continue to use spreadsheets and still be MTD compliant, so long as you follow the correct format, and you or your agent have the necessary bridging software.
Contrary to rumours that HMRC might try to phase it out (as they consider it more open to errors), the tax authority has said it will keep the bridging software as a long term solution. This won’t offer the bells and whistles of the API enabled software packages, and may be more work in the long run. It will mean people will have the option of continuing to use their tried and trusted spreadsheets. When consider the options is it important to weigh up the convenience of continuing to use familiar spreadsheets with the short them hassle of changing to API software which will be more efficient in the long terms and help reduce errors.
What else should I consider?
As always, we would recommend you speak to your adviser before making a decision. You need to pick the best software to help you with record keeping, but you also need to examine your compliance needs.
It’s important to determine what level of service you will need in the future and choose software accordingly. For example, not all software will be able to submit a final declaration, but if your accountant can prepare this for you that might not be a concern.
Price could also be a factor. We anticipate there will be some software providers offering the basics for free, so it may be worth asking what your accountant recommends.
As the date for MTD draws nearer, software options will be finalised and clearer. And that should make it easier for you and your accountant to choose the best approach for you in this new system.
If you would like further guidance, please contact Sam Meir or your usual PKF contact.