Making Tax Digital – 'Functional Compatible Software'

Is it true that the transition to digital tax systems could streamline your business processes?

The UK government’s ‘Making Tax Digital’ initiative requires businesses to keep digital records and use ‘Functional Compatible Software’ to meet VAT obligations.

You may be wondering, what does ‘Functional Compatible Software’ mean? How does it work, and more importantly, how does it affect your operations?

In the forthcoming discussion, we will dissect this seemingly complex term, explore its implications for your business, and most importantly, guide you on how to ensure your business remains compliant, thereby sparking your curiosity to learn more.

Key Takeaways

  • Digital links are required for the transfer, copy and pasting, recapture, or modification of Uk VAT data after 1 April 2021.
  • Each piece of software must be digitally linked to create the digital journey.
  • Manual processes such as cut and paste to move data and manual adjustments/consolidations in spreadsheets are excluded from digital links.
  • API-enabled accounting software or bridging software can be used for VAT return filings and submission of VAT data.


Let’s start by understanding the key points of making tax digital software.

It’s essential to grasp the significance of digital links and data transfer requirements, as well as the process of VAT return filings.

We’ll also touch on the important exclusions from digital links, crucial for VAT compliance.

Key Digital Tax Points

Understanding the key points of digital tax is crucial in the evolving landscape of VAT compliance. The Making Tax Digital (MTD) rules require:

  1. A digital link for VAT data transfer using MTD-compliant software.
  2. Submitting VAT returns via the HMRC tax digital service.
  3. Exclusions from digital links like manual data processes.
  4. Using compatible software for VAT return submission.

Stay informed, as these requirements are key to your VAT compliance.

Essential Digital Tax Advice

Navigating the complexities of digital tax in the UK involves a comprehensive understanding of digital data transfer requirements. This includes precise submission of VAT returns and awareness of exclusions from digital links.

Essential digital tax advice includes choosing the best MTD Software, compatible with Making Tax, to submit your VAT returns directly. Accounting software, like MTD VAT software, is crucial for efficient HMRC filing.

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Frequently Asked Questions

Can I Use Excel for Making Tax Digital?

Yes, you can use Excel for Making Tax Digital. However, you’ll need bridging software to comply with HMRC’s digital link requirement. This software connects your Excel data to HMRC’s API platform for VAT return filings.

What Is the Best Bridging Software for Mtd?

You’re seeking the best bridging software for MTD. Options like Xero, QuickBooks, 123 Sheets, FreeAgent, and Sage Accounting are popular. Consider factors like price, features, MTD compliance, and integration while making your choice.

Which Software for Making Tax Digital?

You’re seeking software for Making Tax Digital. Consider factors like price, your business size, features, MTD compliance, and integrations. Avalara offers solutions that can assist with your VAT compliance needs efficiently.

Can I Still Use Bridging Software for Mtd?

Yes, you can still use bridging software for MTD. It needs to link digitally to HMRC’s systems, allowing you to transmit VAT data from your existing records in a compliant manner. It’s a handy solution.


Navigating the digital taxation landscape can be complex, but understanding the fundamentals of ‘Functional Compatible Software’ and the new digital link requirements is crucial for VAT compliance.

Whether you’re a seasoned business or new to the digital world, staying updated with these changes will help streamline your operations.

Remember, compliance isn’t just about avoiding penalties, but also about embracing efficient and accurate data management processes in your business.

Barry Caldwell

Barry Caldwell

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