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  • Benjamin Elliott

Exploring Business Income Tax Errors & How To Address Within Software Design

Updated: Nov 30, 2022

Exploring Business Income Tax Errors And How These Can Be Addressed Within Software Design

The crux of Making Tax Digital (MTD) is to enable businesses to use third-party software and apps that will automate and streamline their record-keeping processes and submit their taxes accurately the first time.

By making these procedures part of their day-to-day operations, companies will be able to update HMRC on a quarterly basis. This will give them a realistic overview of the tax owed.

Business income tax errors and how these can be addressed within software design were the subject of research conducted at the request of HMRC. It was just one of the research studies carried out in the lead-up to the launch of Making Tax Digital.

The main aim of this particular research study was to help HMRC understand the common income tax errors made by businesses and the reasons thereof. Another major objective was to look at the role of software design in this issue.

Does software design have that great an impact on business income tax errors? And what can you do to ensure that your software is serving you?

In this article, we look at the lessons learned in that research, and what it means for businesses today.

The Research

The research study focused on taxpayers that HMRC had identified as being more prone to errors in their record keeping and reporting for income tax self-assessments. The qualitative study consisted of 36 face-to-face interviews. It looked at how their resistance to the use of software or reliance on other systems attributed to their errors with SA returns.

The Findings

The research indicated that businesses risk making errors in their SA returns due to inadequate record keeping, as well as limited knowledge and understanding of the rules governing their taxes.

Accounting software was viewed as a cost that would provide little benefit, and therefore would not be justified.

Stumbling Blocks To MTD

Several stumbling blocks to the correct practice of MTD have been determined. These are the most common.

Record Keeping Mishaps & Errors

Although many receipts are now digital, at the time of the research study, many receipts were still paper-based. This was especially common amongst sole proprietors.

The failure to procure receipts for payments made to third parties was another large contributor to errors. Where receipts were not available, either due to loss or not receiving one, the data could be omitted from records and lead to discrepancies.

Confusion surrounding tax categories and what could be claimed compounded the problem. In some cases, the terms used by businesses for expense types did not match those found in the tax return. And without proper guidance on how to calculate the business quotient of expenses like utility bills, many participants had to figure it out on their own or leave it out completely.

The majority of participants were using a computer to generate their invoices. The invoices were then printed and stored in a filing system, and not integrated into established software. Where digital record keeping was noted, it was still transferred into the participants’ paper or spreadsheet system.

Understandably, this is where many errors crept in. The methods that businesses used for data entry varied greatly. Some participants treated these spreadsheets as a form of electronic storage, merely copying data over from their earlier paper-based methods.

Although Excel has calculating functionality embedded into its design, many users did not make use of this feature. Instead, they continued to rely on the manual calculation of totals. Therefore, the spreadsheets themselves were not inadequate, but rather the users’ understanding of its functions.

Incomplete Knowledge Regarding MTD

In the course of this research study, and several others conducted by HMRC, a common theme arose. Many participants were uninformed about MTD, its regulations and deadlines, and the totality of what was required. Subsequently, the same errors were made time after time.

Self-employed business representatives were generally well aware of the need for keeping financial records and understood their tax obligations. However, they too often relied on paper-based record keeping, although some then transferred this information into a journal or Excel spreadsheet.

Resistance To Software

The Making Tax Digital initiative aimed to make filing tax returns faster and simpler. It was to achieve this through the use of digital record-keeping and tax reporting. But this required users to be digitally fluent and competent, and at the time research was conducted, this was not prevalent.

Only a limited number of participants in the study were found to be using accounting software. Many businesses relied on their traditional methods of accounting and filing their taxes.

A large part of the problem was that these businesses did not see the need for, or benefit of, specialised software. When weighing up the costs and benefits of MTD, the need for software fell squarely in the “costs” category.

Software Incompatibility

Not all popularly used accounting software was compatible with MTD. This necessitated the upgrade to MTD-compatible software or the use of bridging software in some cases. This was, however, a major stumbling block in the shift to MTD, particularly for smaller businesses.

The need for a more universal accounting software package was clear, but this was clearly lacking. With such a wide variety of accounting software packages available, many participants were uncertain of what they could or should use.

Why Is The Right Software Design Important?

Accounting software can significantly reduce the number of errors that businesses make with their financial record keeping. However, it is only applicable if users know how to use the software to its full potential.

While resistance to digital record keeping was high, the issue of limited software experience also played a role in errors. HMRC has realised the importance of educating the MTD community about these errors.

To minimise mistakes, all MTD-compatible software should in the future incorporate prompts and nudges that address the most common reporting errors at their source.

These messages will act as alerts and include links that will provide guidance and tailored content to assist in future avoidance of these common errors.

Guidance as to the correct procedures, including links to tutorials, can also be implemented to prevent these errors from continuing in the future.

MTD Compatibility

The right software is essential for adhering to MTD regulations. Not all software meets the requirements for MTD, and this is not always clear to businesses who purchase their software, usually through a third party.

MTD compliance relies heavily on the compatibility of software used by the majority of businesses. Because HMRC is depending on the software to do most of the work, all users must understand what is required of them and their record-keeping practices.

MTD Software FAQs

Will My Business Have To Invest In MTD Software?

Transitioning to a digital route does not necessarily mean spending a small fortune on new software. HMRC has stated that there will be free, basic software provided. There are also plenty of low-cost options available on the market if you are looking for a more sophisticated system.

Alternatively, if your business is already using digital accounting software, it is likely that it is compatible with MTD.

What Is MTD Bridging Software?

With the use of bridging software, businesses are able to transfer data through to HMRC from their spreadsheets via digital links.

This is a temporary fix specifically for companies who don’t want to transition to software but need to comply with MTD for VAT regulations.

Is Excel Compatible With MTD Software?

Companies may use Excel spreadsheets after the deadline in April 2021. However, it is important to note that a digital link must be included in the accounting software. This is to provide a smooth digital journey from the bridging software to HMRC.

Is Quickbooks A MTD?

You will receive an email confirmation from HMRC after you sign up for MTD. This will inform you that you may submit your return digitally. It will also include the login details for the Government Gateway.

In order to authorise Quickbooks to interact with HMRC, you will need to turn on MTD and activate to allow Quickbooks.


The shift to MTD has brought with it many changes and challenges for businesses of all sizes and across industries. To fully appreciate the benefits of this digital way of record keeping and financial reporting, a better understanding of software is needed.

While this may not go all the way in counteracting resistance to MTD, it will help those who are keen on the change but not fully equipped to meet its requirements.

Enhanced communication between HMRC, businesses, and accounting software designers is key to the resolution of this issue.

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