Bridging software allows businesses to link their financial records to HMRC in a way which complies with Making Tax Digital rules. Quite literally, it ‘bridges’ the gap between non-compatible records (such as spreadsheets), and HMRC.
Making Tax Digital: A quick rundown
Though Making Tax Digital compliance can still send a shiver up the spine of even the most tech-savvy business owner, MTD rules are now firmly in place for VAT-registered businesses. In short, this means that businesses must keep their VAT records digitally, and use software to make regular submissions to HMRC.
And that’s not all, thanks to MTD ITSA
MTD rules are also on the horizon for Income Tax Self Assessment so whilst it’s tempting to put it off and hope a smooth transition magically happens, it’s probably going to make life easier to start thinking about it sooner, rather than later.
MTD for Income Tax Self Assessment will replace the current system of annual Self Assessment tax returns as we know them. Again, it will mean MTD-compatible software will be necessary instead of simply entering information through an online return portal.
Making MTD compliant submissions
Under MTD rules you’ll need to keep financial records digitally for your business. You do have some options here:
- Fully MTD compliant bookkeeping software (such as Pandle) to record all of your transaction data, and then submit it directly to HMRC from the software
- Using non-compliant software, such as spreadsheets, to record your data, and then use bridging software to submit your data to HMRC.
It’s generally accepted that using cloud-accounting software makes things easier. It’s an all-in-one solution, often with lots of other excellent features designed to ease the bookkeeping burden.
But if you’re particularly attached to your spreadsheet or to a software provider who isn’t MTD-compliant (they’re out there!), you can still comply with the rules by using bridging software to make your submissions.
What are the benefits versus disadvantages of using bridging software?
Most businesses have spreadsheets so we’re usually very familiar with using them which, in turn, makes it seem like a safe bet. If you’re feeling nervous about abandoning your current spreadsheets completely, then using bridging software can help you make the switch in a more gradual way.
Bridging software can be a helpful tool but there are limitations. The main one being that although it allows you to make MTD-compliant submissions, it won’t help you meet other requirements like electronic record-keeping.
The upshot is that business owners still need to use their own spreadsheets and software alongside it. That means data is in multiple places, and you’ll need to spend time messing around with imports, exports, downloads, uploads… As such there’s a much higher risk of errors or confusion, and they’re not words anyone likes to associate with their tax return.
There’s also no guarantee that bridging software will comply with MTD requirements in future. It’s for this reason that it should really be treated as a stop gap – a short-term fix if you like. It’s great now for VAT, but if any further data is needed by HMRC in future then a more permanent, comprehensive solution is needed.
Picking a more permanent MTD software provider
If you’re ready to take the plunge and choose an all-the-bells-and-whistles MTD software, research it just like any other business decision. For example:
- What does your business need?
- What solutions are available that can help you save time, and reduce the risk of any errors?
- Do you have a budget?
- Will other people, like staff or your accountant, need access (that you can control)?
It’s also worth making sure that they appear on HMRC’s list of approved MTD software!
To sum up…
Bridging software is, for many businesses, the perfect way to meet MTD obligations in the short term and ease them into the transition. But its lack of futureproofing, and the fact it doesn’t meet MTD rules around recordkeeping, means it’s not a viable solution long term.
It’s well worth taking professional advice and understanding all the options available, both in terms of bridging software and something more permanent.