HMRC’s Making Tax Digital (MTD) requires small businesses to report tax details online, with the goal of promoting compliance and accuracy. Cloud-based accounting solutions play a necessary role in helping ease the transition, with real-time information, automatic refreshing, and seamless integration with fiscal software.
As per the government’s own study, 45% of UK SMEs are not ready for future stages of MTD. HMRC has come out with a list of cloud-enabled compatible software that can aid in this transition.
This blog is aimed at helping small business owners learn about the best cloud-based accounting software that will help them stay in compliance with HMRC’s new MTD mandates and give their business an overall boost.
What is ‘Small Business’ According to HMRC?
Before one can solve, one should also be aware of what HMRC defines as a small business. HMRC uses the Companies Act 2006 criteria to define it. To qualify as a small company, it must meet at least two of the three criteria outlined below: turnover, employees, and balance sheet. This criterion is used to distinguish between small businesses and large businesses for the purposes of taxation, reporting, and regulation.
- Turnover: No more than £10.2 million
- £5.1 million or less on the balance sheet
- 50 or fewer staff
For Making Tax Digital for Income Tax, for sole traders and property landlords, the appropriate threshold is business turnover of over £50,000 a year, falling to £30,000 in April 2027.
Top 5 Cloud-Based Accounting Solutions
The proper accounting solution is central to MTD preparation and financial management. The five best-of-breed UK solutions are MTD-compliant, with key features of cloud-based accounting systems for businesses today.
Xero
Xero is most commendably clean-looking and easy-to-understand, with excellent integration functionality through its app store. It also best fits the needs of the global companies since it can handle multiple currencies and is internationally oriented. Xero further allows accountants and bookkeepers to work together in real-time, and hence it is suitable for small businesses with shifting or complicated requirements.
- Clean and user-friendly interface
- Supports multiple currencies for global companies
- Enables real-time collaboration for accountants and bookkeepers
| Solution | Best For | Key Features | Use Cases |
|---|---|---|---|
| Xero | Small businesses with global/multi-currency needs | 1. Clean, user-friendly interface 2. Supports multiple currencies 3. Real-time collaboration for accountants and bookkeepers | 1. A UK-based e-commerce startup selling internationally 2. Accounting firms managing multiple small business clients in real-time |
QuickBooks
QuickBooks remains ahead in the game when it comes to providing a vast array of tools that cater to various small businesses. Cash flow forecasting using AI, receipt capture, and bank feeds automatically are a few among many features that assist business owners in saving time as well as receiving improved financial insights. Its rich reporting and mobile compatibility are two of the reasons that it is a multi-function, one-size-fits-all tool, though the extensive feature set daunts new users to it.
- AI-powered cash flow forecasting
- Automated receipt capture and bank feeds
- Rich reporting and mobile compatibility
| Solution | Best For | Key Features | Use Cases |
|---|---|---|---|
| QuickBooks | Small businesses that need a wide range of tools | 1. AI-powered cash flow forecasting 2. Automated receipt capture & bank feeds 3. Rich reporting & mobile compatibility | 1. A retail shop tracking daily sales and forecasting cash flow 2. Service-based business owners managing expenses on mobile |
SAGE
SAGE Accounting is a recognized UK brand that has been serving businesses for many years. The cloud-based solution supports features like invoicing, cash flow management, VAT submissions, and a lot more, as well as premium payroll services. The inclusion of Sage Copilot, which is an artificial intelligence assistant, aids in automating activities like categorization and forecasting, and it is ideal for growing businesses that require full compliance and reporting functionality.
- Cloud-based platform supporting invoicing, cash flow management, VAT submissions, and more.
- Premium payroll services included.
- Sage Copilot is an AI assistant for automation, compliance, and reporting.
| Solution | Best For | Key Features | Use Cases |
|---|---|---|---|
| Sage | Growing businesses requiring compliance & payroll | 1. Invoicing, cash flow, VAT submissions, and more 2. Premium payroll services 3. Sage Copilot AI assistant for automation & reporting | 1. A mid-sized manufacturing company requiring payroll & VAT compliance 2. A growing consultancy needing advanced compliance reporting |
FreeAgent
FreeAgent is geared towards microbusinesses, freelancers, and contractors. It stands out in that its features are easy to use, like automated invoicing, recording expenses, and a novel tax schedule that provides visual notice when deadlines approach. The benefit of using FreeAgent is that it is stocked regularly for free for bank customers like NatWest and RBS, making it cheap for ultra-low businesses and sole traders.
- Automated invoicing
- Expense recording
- Visual tax deadline notifications
| Solution | Best For | Key Features | Use Cases |
|---|---|---|---|
| FreeAgent | Microbusinesses, freelancers, and contractors | 1. Automated invoicing 2. Expense recording 3. Visual tax deadline notifications | 1. A freelance graphic designer managing invoices & expenses 2. A contractor keeping track of tax deadlines with reminders |
Zoho
Zoho has a low-cost, flexible solution that is MTD-compliant. It has robust automation capabilities, recurring invoices, and expense management, and can be easily integrated with other Zoho applications like CRM, HR, and stock. With mobile-first development and competitive pricing, Zoho is especially popular among companies seeking a low-cost solution to simplify business without compromising on features.
- MTD-compliant and affordable solution
- Easy integration with other Zoho applications, such as CRM, HR, and stock
- Mobile-first development and competitive pricing
These solutions offer UK small businesses reliable, MTD-compatible software to manage their finances, keep admin minimal, and focus on growing the business.
| Solution | Best For | Key Features | Use Cases |
|---|---|---|---|
| Zoho Books | Cost-conscious businesses need integration | 1. MTD-compliant & affordable 2. Integration with Zoho apps (CRM, HR, stock) 3. Mobile-first development & competitive pricing | 1. A small trading company integrating CRM & accounting 2. A startup seeking low-cost, scalable accounting software |
Industry-Specific Software Use Cases
Every industry has its own accounting needs, so there isn’t a ‘one-size-fits-all’ solution. Having software that suits their purpose can invite compliance, ease operations, and streamline procedures. It also reduces the workload for employees, freeing up time and resources for other tasks.
Healthcare – UK healthcare organizations generally deal with complex payroll, expense management, and regulatory compliance, especially because the NHS is also a signatory to the agreement. Sage Accounting or Xero are good choices because they handle payroll well and integrate with patient management and billing packages.
IT / SaaS – IT and SaaS companies would usually need subscription billing, revenue recognition, and multi-currency capabilities. Products like Xero and Zoho Books offer recurring billing, automation, and integration with CRM or project management apps.
Manufacturing – Manufacturers will typically require inventory management, cost accounting, and supply chain management, along with bookkeeping. QuickBooks Online and Sage Accounting are good options as they support inventory and ERP software integration to ensure improved insight into production.
Financial Services – These firms need accurate accounting, compliance, and audit support. The secure confidentiality of information is also paramount. TaxCalc, DIGITA, or AlphaTax best manage compliance and accounting, while Caseware or Inflo provides audit support features.
Real Estate – Property businesses utilize mostly lease management, cash flow projections, and tax advice. Small property companies or sole traders would be appropriate for FreeAgent, but for large portfolios, Xero or Zoho Books are more appropriate, with integration required in CRM and payment systems.
Conclusion
Though Making Tax Digital (MTD) seems daunting, it can be the doorway to allowing small firms to streamline processes and become more transparent. Cloud-based accounting firm software not only keeps companies compliant but also offers up-to-date cash flow, expense, and profitability figures. When choosing software, consider the size of your business, industry needs, and the most critical features of cloud accounting systems that enable compliance as well as growth.
At AcoBloom, we empower small businesses and accounting firms with seasoned outsourcing services, enabling them to select the right technology while achieving effectiveness. If you want to know how the right digital tools will empower your financial management, reach out to our experts today.
