Best Accounting Software For Making Tax Digital VAT

If you’re a small business owner, freelancer, or sole trader in the UK, you’ve likely heard about Making Tax Digital (MTD). But with so many software options on the market, how do you know which one is best for your needs; especially when it comes to VAT?

Let’s break it down with simple questions and straightforward answers.

Q: What Is Making Tax Digital for VAT?

Making Tax Digital (MTD) is an HMRC initiative that requires VAT-registered businesses to maintain digital records and submit VAT returns using MTD-compatible software. It aims to reduce errors, save time, and make tax administration more efficient.

If your business earns more than £90,000 in taxable turnover, MTD for VAT is mandatory. But even if you’re under the threshold, signing up voluntarily can simplify things and help future-proof your finances.

Q: Do I Really Need Special Software for MTD?

Yes. Under MTD rules, you must use software that’s officially recognised by HMRC. This software needs to:

Keep digital records of your sales and purchases
Calculate your VAT correctly
Submit your VAT returns directly to HMRC

Gone are the days of manual data entry on the HMRC website. Whether you choose cloud-based software like QuickBooks or Xero or opt for making tax digital bridging software to connect spreadsheets, the tool must meet HMRC’s standards.

Q: Which Software Is Best for a Small Business?

For ease, affordability, and compliance, QuickBooks and Xero are two of our most recommended tools: especially if you’re self-employed and new to bookkeeping. Both are cloud-based, intuitive, and fully making tax digital compatible software.

The benefits of using QuickBooks for MTD include:

Automatic bank feeds
Real-time VAT calculations
User-friendly dashboards
Direct submission to HMRC
Expense and mileage tracking
Excellent support and training

Whereas, the main benefits of using Xero for MTD include:

Simple bank feed integration
Real-time cash flow tracking
Automated invoice reminders
Direct VAT submissions to HMRC
Mobile app for expense management
Strong third-party app integrations

Angela Boxwell, MAAT and founder of Business Accounting Basics, is a QuickBooks ProAdvisor and has tested a variety of solutions, including Xero. She often recommends QuickBooks for its simplicity and built-in mileage tracking, while also recognising Xero’s flexibility, automation features, and seamless integration with other business tools.

Both are excellent options for managing self-employed tax efficiently.

Q: What If I Still Use Excel?

You’re not alone: many business owners love spreadsheets. If that’s you, look for making tax digital bridging software. These tools link your existing Excel records to HMRC’s portal, keeping you compliant without changing your entire system.

Just remember: the bridging software must still be HMRC-approved.

Q: Can I Do It Myself?

Absolutely. Many self-employed individuals use tools like QuickBooks or Xero to manage their records and file VAT returns without needing an accountant. With features like auto-categorisation and live reporting, you don’t need to be a finance expert to stay compliant.

Angela’s free resources; like bookkeeping templates and guides; can also help you get started. We provide numerous bookkeeping examples for self-employed individuals and step-by-step downloads tailored to meet the needs of small businesses.

Q: What Else Should I Look For in MTD Software?

When choosing an accounting tool, look beyond just compliance. Consider features that save you time and support your business growth, such as:

Automation – Less manual entry means fewer mistakes
Invoicing tools – Track payments and chase late payers
Reporting – Get insights into profit, cash flow, and VAT liability
Support – Access to live chat or how-to videos when you’re stuck

Think of your accounting software as more than a tax tool: it’s a business ally.

Q: Are There Penalties for Getting It Wrong?

Yes. HMRC uses a points-based system for late submissions. Frequent delays or errors can lead to financial penalties. That’s why using the right accounting software basics from the start is key.

Whether you’re a new sole trader or a growing small business, choosing the right software for making tax digital VAT is essential. You don’t need to spend hours buried in spreadsheets. With the right tools and a little guidance: you can stay compliant, save time, and focus on what you do best: running your business. For further guidance and advice, please read through our informative bookkeeping basics page to get started.