What is Making Tax Digital bridging software?
Currently, many businesses use spreadsheets to hold their accounting data and enter their VAT returns manually into a government gateway. This manual entry will no longer be allowed under MTD.
Bridging software allows data to transfer through to HMRC from spreadsheets via ‘digital links’. They’re an interim solution for businesses who need to comply with MTD for VAT regulations, but who don’t want to use full MTD software.
What are ‘digital links’ and how do they work?
A ‘digital link’ is an electronic transfer or exchange of data between software programs, products or applications. ‘Digital links’ therefore allow data to move between one program and another, such as spreadsheets.
The pitfalls of bridging software
Even though bridging software may look like an attractive short-term solution to help you with MTD-compliance, in the long run it may well mean more work for less reward. If you are interested in using bridging software, there are a few things to bear in mind:
- On its own, bridging software does not fulfil the other requirements of Making Tax Digital, such as digital record keeping and maintaining digital links between data. You may also have to perform further calculations to get spreadsheet data into the format required by the bridging software.
- Bridging software is not an end-to-end MTD solution. For other MTD compliance requirements, such as electronic record-keeping, you’ll still need to use your spreadsheet or non-compatible bookkeeping software.
- Many bridging software solutions don’t feature in-product guidance checks, nudges and prompts. For example, Xero posts notices of HMRC’s planned maintenance periods, and prompts for late claims and unreconciled statements. These all help to increase the efficiency of the VAT return process.
- Overall, bridging software doesn’t offer businesses the tools they may require to run their business on a day-to-day basis. Features such as invoice generation, bank reconciliation, quotes, bills and capturing bills and receipts are available within accounting software such as Xero and can help you build a healthier business overall.
While bridging software can help you with MTD compliance, the time-saving benefits of cloud software far outweigh the additional costs for most businesses. If you do decide to use bridging software, the HMRC MTD for VAT vendor list can be used to find a provider.
Making Tax Digital for small businesses
Our comprehensive guide covers everything you need to know about Making Tax Digital (MTD) for VAT as a small business owner.
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