Can You Use Spreadsheets for Making Tax Digital?

Making Tax Digital (MTD) represents a huge shakeup of the UK tax system which will change how self-employed people manage their tax obligations. As a result, many small business owners are considering whether they need to move away from their existing record-keeping methods and adopt accounting software to remain compliant.

There is another way, however, as spreadsheets can be used for Making Tax Digital, but you should carefully consider their limitations and drawbacks, and the benefits you can miss out on if you don’t use accounting software.

In this post we’ll explore how spreadsheets fit into the MTD system, what their advantages and disadvantages are and why you should consider using accounting software, but firstly it’s important to understand what Making Tax Digital is.

Making Tax Digital Explained

Making Tax Digital (MTD) is an ongoing Government initiative to move the majority of the UK tax system away from paper-based methods and onto approved digital software for record keeping and reporting.

MTD regulations mandate taxpayers to use digital systems, either spreadsheets with bridging software or accounting software, to manage their records and there are also changes to how you report your income.

Under MTD for Income Tax, you must:

• Keep digital records of income and expenses
• Use HMRC-compatible software
• Submit quarterly updates to HMRC
• Submit a final declaration to HMRC

The aim of MTD is to streamline the tax system, improving accuracy, efficiency and transparency. The quarterly updates are a key component as taxpayers will have to be more proactive with their record-keeping throughout the year, rather than making it a once-a-year task, which gives a better understanding of your ongoing financial position.

If you’re a sole trader or landlord that earned over £50,000 a year in your last tax return, you need to comply with MTD for Income Tax from April 2026. You’ll have more time to prepare if you earn over £30,000 with MTD compliance becoming mandatory from April 2027, and for those that earn over £20,000, the next phase of the MTD rollout will likely apply to you from April 2028.

Can You Use Spreadsheets for Making Tax Digital?

You can use spreadsheets, in conjunction with bridging software, and remain compliant with your obligations under MTD. Although it is recommended to use accounting software, a requirement of MTD is to keep your records digitally and spreadsheets facilitate this.

However, your records must also be submitted to HMRC digitally through compatible software, and though spreadsheets in isolation fall short in this respect, bridging software can be used to make direct digital submissions to HMRC to ensure compliance.

It’s also important to understand HMRC’s digital links requirement. This means that once data is entered into your spreadsheets, it must flow automatically to your bridging software without manual copying or retyping. Data must transfer through a digital link, such as an integration, formula, or structured import. Manual processes like copy-and-paste would not be compliant, even if your records are digital.

What is Bridging Software?

Bridging software essentially acts as a link between your spreadsheet and HMRC’s systems, allowing them to communicate. Rather than managing your records with accounting software, bridging software extracts data from your spreadsheet and submits it electronically to HMRC in the required format. This enables small business owners that prefer spreadsheets to continue using them and still meet their MTD obligations.

What are the Advantages of Using Spreadsheets for MTD?

Many self-employed people already use spreadsheets to manage their records and finances, and there are some benefits of keeping this system under MTD, including:

• Spreadsheets can be low a low cost solution compared to accounting software
• Familiarity minimises disruption
• Not having to take the time to set up and learn how to use accounting software

For sole traders with relatively simple finances and a small number of transactions, spreadsheets can offer a simple solution for MTD compliance, but this system also has its limitations.

The Drawbacks of Using Spreadsheets for MTD

There are various disadvantages of using spreadsheets, as opposed to accounting software, for MTD:

• Increased time spent manually entering and checking data, which is exacerbated by the quarterly updates under MTD
• Manual errors with data entry
• Errors in formulas
• Missing or duplicated transactions
• Difficulty generating reports and getting insights on financial performance
• Limited automation functionality

Using spreadsheets will take more manual effort and therefore time to manage, and the risk of errors, non-compliance and penalties is higher. Spreadsheets are not the most accurate or efficient solution and as your business grows, the limitations of them can increase and this is part of the reason why so many small business owners have switched to accounting software.

Why You Should Use Accounting Software

Accounting software provides significant benefits that go way beyond just achieving MTD compliance and that far exceed the capabilities of spreadsheets.

Accounting software, such as FreeAgent and Xero, can:

• Link with your business bank account to import your transactions
• Reconcile your transactions
• Categorise income and expenses
• Generate key financial reports such as profit & loss and balance sheets
• Produce tax and cash flow projections
• Submit directly to HMRC in accordance with HMRC regulations

Automation streamlines the whole record-keeping process by importing your transactions via bank feed and categorising and reconciling them, improving accuracy and efficiency and freeing up more of your time despite the increased MTD reporting frequency.

This reduces the risk of errors commonly associated with manual data entry and spreadsheets whilst also giving you a real-time overview of your financial position. With up-to-date insights at your fingertips, it becomes much easier to make informed business decisions, understand your tax position, plan ahead with confidence and stay compliant.

How We Can Help With Your MTD Obligations

We are big believers in the benefits of technology to support our clients which is why we always recommend using accounting software over spreadsheets. We have been technology-focused from our inception and are Platinum Partners with both FreeAgent and Xero, which we provide as part of our accountancy packages.

We make MTD compliance simple. Through our MTD Comply and Complete packages, you’ll receive the HMRC-recognised cloud accounting software and the expert support you need to meet your obligations.

Whether you’re looking for full year-round support from your own dedicated accountant, including tax planning advice and much more, or a more streamlined service focused just on MTD compliance, we have an accountancy package that fits your needs.

With support and guidance from your own dedicated accountant, you can maximise the benefits of using accounting software, streamline your bookkeeping, better understand your financial position and stay fully compliant with MTD requirements. Get in touch today to learn more.