MTD: What is bridging software?
Bridging software is essentially an all-in-one solution that meets all the Making Tax Digital needs of running a business. It works by extracting and collecting data from spreadsheets and consolidating it for MTD requirements. It then links the data to HMRC’s portal and electronically submits it.
Business owners are still able to maintain their spreadsheets for keeping digital records. But (and the name kind of gives this away), bridging software behaves like a bridge between the business and HMRC’s tax return portal.
However, deciding which bridging software to use isn’t always easy and there’s a lot to consider. Does the business have sufficient record-retention capabilities? What about data security? Whichever bridging software your client chooses, it will need to be authenticated properly so that data integrity isn’t compromised.
How does bridging software make life easier?
Firstly, bridging software works with spreadsheets - and every business has spreadsheets. It will also work with other slightly outdated bookkeeping products that are unlikely to be compatible with MTD. It therefore means that businesses can make the switch to MTD more gradually, because data can be extracted directly from the source of choice and made compatible with MTD regulations.
Secondly, it can all be a bit of a minefield around MTD rules concerning maintaining digital records. This is especially the case where businesses are still using spreadsheets to complete their tax returns. Bridging software can therefore come in useful here, because it means all data is securely stored and backed up ready. It also means business owners can carry out daily tasks like sending invoices and tracking payments.
Last but certainly not least, business owners don’t need to manually calculate their VAT before putting it into their tax return. That’s because then invoices or payments are made, the bridging software will automatically work out what VAT is due and add it to their VAT return. Once the filing period has ended, all the VAT calculations are consolidated into one return ready for submission.
It all means saving time and effort basically. There’s less worry about dealing with tax returns, which means your client can focus on growing their business instead.
What are the downsides to bridging software for Making Tax Digital?
Bridging software is certainly very useful, but it does have its limitations.
Although it works for VAT, it isn’t compatible with other MTD stipulations like electronic record-keeping. This means that business owners will still have to use their existing non-compatible bookkeeping software or spreadsheets.
Bridging software should be thought of as a short-term fix, largely because there’s no guarantee that it will be able to keep up with new MTD demands of the future. Yes it’s fine for now for VAT, but if HMRC ask for any additional data as part of the return then this is where it comes somewhat unstuck.
Bridging software and Excel
Let’s assume your client’s business uses Excel. The nine box figures all link up to other sections of the spreadsheet, making them compatible with MTD rules around digital record keeping.
The business owner then tells the bridging software which cells the data is located in. For instance, the total output VAT for box 1 may be located in cell C6. This information is then sent to HMRC using the bridging software.
So with this example given, each digital transaction is entered on Excel. But after that, the data is only ever totalled or displayed elsewhere via linked cells or formulas. It doesn’t need to be retyped manually, so is obviously less labour-intensive.
Bridging software and older software
Any bookkeeping software that’s able to produce a CSV file will also work with bridging software, allowing MTD compliance. This would apply to businesses using older versions of Quickbooks or Sage for instance.
Different bridging software options
There’s a range of MTD-compatible bridging software out there including:
- MTD Express
- Intuit (QuickBooks)
- BTC Software
- Absolute Software
- Neilson James Technology
- PWC (free to charities)
Pretty much all of them involve the purchase of a licence which generally costs around £40 per year. Many of them also offer accountant licences that can bring the cost down to around £2 per client per quarter (this depends on the number you buy).
No two options are quite the same so it’s well worth encouraging your clients to do their homework.
To sum up…
Bridging software is an excellent way of your clients meeting the requirements for Making Tax Digital, at least in the short to medium term. But it’s not a watertight solution as it isn’t future-proof and doesn’t meet the requirements for digital record keeping.
This why it’s worth discussing your client’s requirements with them and making sure they understand that bridging software is literally that’ a temporary stopgap measure. It’s a very useful tool but shouldn’t be seen as a permanent solution. A far better solution is to purchase a full, cloud-based accounting system that is fully MTD-compliant.
This article was written by Myriad Associates
Myriad Associates is a small UK-based R&D tax and funding consultancy with offices in France and Ireland too. With over a decade of specialist experience behind us, our team can work with both you and your clients remotely on their R&D Tax Credits award.
So if any of your clients have undertaken a project recently that required scientific or technical research, why not find out if they could thousands in tax relief. Regardless of size or industry, any UK company can apply, and by partnering with us there’s a generous couple of referral packages on offer too.
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