What software is HMRC compatible for very small businesses?

Understanding what “HMRC compatible” really means

When very small businesses in the UK look for “HMRC compatible” software, they’re usually trying to solve two problems at once: staying compliant with tax rules and reducing admin time. The phrase can sound like a badge that any vendor can stick on a website, but in practice it refers to software that can interact with HMRC in the ways that matter for your obligations—most commonly, sending VAT returns digitally under Making Tax Digital (MTD) for VAT, and in some cases supporting payroll submissions (RTI), CIS, and preparation for MTD for Income Tax.

For the smallest businesses—sole traders, micro limited companies, one-person consultancies, small shops, tradespeople, and side-hustles—the most important part of compatibility is usually whether the software can submit the right information to HMRC at the right time without you retyping figures into HMRC’s online forms (where that’s no longer allowed for certain taxes). In other words: it’s about digital submission, accurate record keeping, and a clean audit trail.

It’s also worth separating “HMRC compatible” from “HMRC approved.” HMRC doesn’t “approve” commercial accounting software in the way that might be implied. Instead, HMRC publishes lists of software that can support specific services (like MTD for VAT). A product may be compatible for VAT submissions, but not be designed for payroll, or might work well for sole traders but be awkward for a VAT-registered retail business. So the practical question for very small businesses is: compatible for which HMRC process, and compatible in what way?

The HMRC obligations most very small businesses need to cover

Very small businesses aren’t all the same. A one-person limited company has different moving parts from a sole trader with a part-time employee, and a micro e-commerce shop has different needs from a self-employed consultant. Before you choose software, it helps to map your likely HMRC touchpoints. The main ones are below, and you may have just one of them—or several.

Making Tax Digital for VAT

If your business is VAT registered, the core requirement is that VAT returns are submitted digitally using compatible software. This is the most common reason micro businesses search for HMRC-compatible tools. Software can range from full bookkeeping platforms to simple “bridging” tools that submit VAT figures from a spreadsheet.

Very small businesses sometimes prefer minimal systems: a spreadsheet for recording sales and costs, paired with a bridging tool to file the VAT return. Others prefer an all-in-one bookkeeping platform that captures invoices, bank transactions, and VAT calculations automatically. Both can be valid approaches if they meet the digital requirements and you keep proper records.

Income Tax for sole traders and landlords

Sole traders typically deal with Income Tax through Self Assessment. Over time, MTD for Income Tax is expected to introduce more frequent digital updates for many self-employed people and landlords. Even if you’re not yet affected, choosing software that can scale into these requirements can save you a disruptive switch later. Many very small businesses care less about sophisticated reporting and more about the basics: tracking income and expenses, keeping receipts, and producing figures their accountant can use.

Corporation Tax for limited companies

Limited companies pay Corporation Tax and file accounts with Companies House, not HMRC alone. Many micro limited companies still want software that supports year-end reporting, provides clean ledgers, and exports data easily for an accountant. For the smallest companies, the key is often a platform that keeps day-to-day bookkeeping simple and reduces year-end fees by keeping data tidy.

PAYE and payroll submissions (RTI)

If you have employees (including if you pay yourself through PAYE as a company director), you may need payroll software that can submit RTI (Real Time Information) reports to HMRC. Some accounting platforms include payroll as a paid add-on; others integrate with specialist payroll tools; and HMRC also provides basic tools for very small employers in some circumstances. For micro employers, the decision is usually about cost, ease of use, and whether you need features like pensions auto-enrolment support.

Construction Industry Scheme (CIS)

If you’re a contractor or subcontractor under CIS, you may need software that can calculate deductions, produce statements, and submit monthly CIS returns to HMRC. Not every bookkeeping platform handles CIS well, so if you operate in construction, this should be part of your compatibility checklist.

What types of software can be HMRC compatible?

“HMRC compatible” doesn’t point to one category of product. It can include a range of tools that each cover different slices of the admin burden. For very small businesses, the main categories are:

1) Full accounting and bookkeeping software: These platforms handle invoicing, expense tracking, bank feeds, VAT calculations, reporting, and often direct submission of VAT returns under MTD. They’re designed to be an all-in-one hub.

2) VAT bridging software: This is for businesses that keep digital records in spreadsheets and simply need a compliant route to submit VAT returns digitally. Bridging tools tend to be cheaper and simpler, but they don’t replace bookkeeping.

3) Payroll software: Tools that submit RTI reports, calculate PAYE, and often support pension contributions and payslips. Some are standalone; some are integrated with accounting platforms.

4) Expense and receipt capture apps: These help with the “evidence” side of compliance—capturing receipts, categorising costs, and keeping a digital record trail. They may integrate with bookkeeping platforms.

5) Point-of-sale (POS) and e-commerce integrations: If you sell through a till system, online shop, or marketplaces, integrations can reduce errors and speed up VAT reporting by feeding sales data into your accounting system.

Key criteria for very small businesses choosing compatible software

Small-business accounting choices are often made under pressure: VAT deadlines, accountant requests, or a sudden realisation that “shoe-box receipts” won’t scale. The best choice for a very small business isn’t automatically the most famous brand; it’s the one that matches your workflow and stays affordable while meeting requirements. Here are the criteria that matter most.

1) Confirm the specific HMRC service you need

Start with the practical question: what do you need to submit, and how often? If you’re VAT registered, MTD for VAT submission is essential. If you run payroll, RTI submissions are essential. If you’re a sole trader and preparing for future MTD changes, you may want software designed with that in mind. “Compatible” should be validated against your own obligations, not a vague claim.

2) Choose between “all-in-one” bookkeeping and “bridging” approaches

If you currently use spreadsheets and you’re comfortable with them, bridging software can be a low-cost way to stay compliant for VAT. However, spreadsheets require discipline: consistent categorisation, a clear method to avoid overwriting figures, and an approach to linking records and evidence. All-in-one bookkeeping software is often better for reducing errors, automating VAT calculations, and keeping everything in one place. The trade-off is subscription cost and the learning curve of a new system.

3) Look for bank feeds and simple reconciliation

For micro businesses, the biggest time-saver is often bank feeds—automatically importing transactions from your bank and letting you match them to invoices or categorise them as expenses. This reduces manual entry and helps you stay “VAT-ready” throughout the quarter rather than scrambling at the deadline.

4) VAT handling that matches your scheme

Not all VAT situations are identical. Very small businesses may be on the Flat Rate Scheme, Cash Accounting Scheme, or deal with partial exemption, reverse charge, or sales to the EU and beyond. Your software should handle your scheme correctly. If you have a simple UK-only service business on standard VAT accounting, many mainstream tools will be fine. If your VAT position is more complex, it’s worth selecting software that supports those scenarios or working closely with an accountant to configure it properly.

5) Ease of use matters more than extra features

Micro businesses often don’t need deep project accounting or complex inventory forecasting. What you do need is software you’ll actually use. A clean interface, a simple “add receipt” workflow, clear VAT summaries, and straightforward invoicing are often more valuable than advanced dashboards you’ll never open.

6) Accountant access and exports

Even if you do your own bookkeeping, your accountant may need access for year-end accounts, corporation tax computations, or to review VAT. Many platforms allow you to invite an accountant with special permissions. If you prefer not to give access, look for clean exports (like trial balance, general ledger, VAT reports) and the ability to attach receipts to transactions. Good data reduces accountant time, and that can reduce your fees.

7) Total cost, including add-ons

Subscription pricing can be deceptive if the features you need sit behind add-ons. Payroll, additional users, advanced reporting, multi-currency, or CIS modules might cost extra. For very small businesses, it’s wise to price the full setup you need for a year—not just the entry plan.

Common HMRC-compatible options for very small businesses

Because “compatible” depends on the HMRC process you’re dealing with, it’s helpful to think in terms of solution patterns rather than a single definitive list. Below are the most common types of options micro businesses use, with notes on who they tend to suit.

Option A: Full bookkeeping software that supports MTD for VAT

This is the most common route for micro businesses that want to reduce admin. You record invoices and expenses inside the system, connect your bank feed, and the software calculates VAT and submits your VAT return digitally. Many platforms also allow basic reporting like profit and loss, cash flow summaries, and customer balances.

Who it suits: small service businesses, freelancers, tradespeople, consultants, micro limited companies, and VAT-registered businesses that want simplicity.

Strengths: automation, fewer spreadsheet errors, easier year-end handover, and often good mobile apps for receipts.

Watch-outs: monthly cost, add-on pricing for payroll, and needing to configure VAT correctly at the start.

Option B: Spreadsheet bookkeeping plus VAT bridging software

If you’re already comfortable with spreadsheets and your bookkeeping is stable, bridging software can be the cheapest path to MTD VAT compliance. You keep your records digitally in a spreadsheet and use bridging software to file the VAT return to HMRC.

Who it suits: very small VAT-registered businesses with simple transactions, strong spreadsheet discipline, or businesses transitioning gradually to full bookkeeping software.

Strengths: low cost, minimal disruption, and you keep your existing workflow.

Watch-outs: higher risk of manual errors, less automation, and you still need a reliable method for keeping digital records and supporting documents.

Option C: Payroll-only tools for RTI reporting

Some micro businesses use separate payroll software even if they run bookkeeping elsewhere. This can be a good fit if you only have one or two employees and want a focused tool that handles payslips, PAYE calculations, and RTI submissions cleanly. If you’re a company director paying yourself through PAYE, a simple payroll solution can be enough.

Who it suits: micro employers, limited company directors, small charities, and businesses with straightforward payroll.

Strengths: purpose-built payroll features, often clearer compliance support, and sometimes lower cost than a full accounting add-on.

Watch-outs: double entry if payroll journals don’t integrate smoothly with your accounting system, and extra subscriptions to manage.

Option D: Accountant-led solutions

Many very small businesses choose software based on what their accountant prefers. In this model, you may use a simple app for invoicing and receipt capture, and your accountant maintains the ledgers and submissions. Alternatively, the accountant sets you up on a bookkeeping platform and you do the day-to-day entry with their oversight.

Who it suits: business owners who want minimal admin, businesses with complex VAT, or owners who prefer support and reassurance.

Strengths: less risk of incorrect setup, professional oversight, and smoother year-end compliance.

Watch-outs: potentially higher fees and less visibility if you don’t engage with the records regularly.

How to check whether software is actually compatible

Because the phrase “HMRC compatible” can be used loosely in marketing, it’s smart to verify compatibility in practical ways before you commit. For very small businesses, you can keep the checks simple.

Check 1: Does it support the specific submission you need?

If you need MTD for VAT, confirm the software can submit VAT returns digitally under MTD—not merely calculate VAT. If you need payroll submissions, confirm it can file RTI to HMRC. If you need CIS returns, confirm it can submit CIS monthly returns and produce subcontractor statements.

Check 2: Does it match your business type and VAT scheme?

Compatibility isn’t just about sending data; it’s about calculating figures correctly. If you use the Flat Rate Scheme, ensure the software supports it and that you can apply the correct percentage. If you use cash accounting, ensure the VAT is calculated on payments rather than invoice dates. If you sell a mix of standard-rated and zero-rated goods, check the VAT codes and reporting are clear.

Check 3: Does it create a clean digital audit trail?

Even for micro businesses, good record keeping matters. A clean audit trail means you can trace a VAT return figure back to underlying transactions, and those transactions back to invoices, receipts, or bank entries. Software that allows attachments, notes, and clear reports can make your life easier if you ever need to review or explain a figure.

Check 4: Is it usable on your devices and by your team?

Many very small businesses operate from a phone, not a desktop. If you’re scanning receipts at the end of a job, you’ll want a mobile app that’s quick and reliable. If you have a bookkeeper or accountant helping, check how easy it is to grant access and control permissions.

Check 5: Can you leave later?

Software should make compliance easier, not trap you. Check whether you can export your data in common formats, whether you can download invoices and reports, and whether you can keep an archive if you cancel. Even tiny businesses outgrow tools, and switching becomes much easier if your records can move with you.

Practical setups that work well for very small businesses

Choosing software can feel abstract until you see what a workable setup looks like. Here are several common “stacks” that keep HMRC obligations manageable without overcomplicating life.

Setup 1: Sole trader (non-VAT) who wants simple bookkeeping

A straightforward bookkeeping app that tracks income and expenses, includes receipt capture, and produces a clean profit and loss report. Bank feeds reduce manual work. If you work with an accountant, give them access or export your reports at year-end.

Setup 2: VAT-registered micro business with simple transactions

Option A is often best: a full bookkeeping platform that supports MTD VAT submissions. Connect your bank feed, issue invoices in the system, and keep receipts attached to transactions. This reduces end-of-quarter stress because VAT is largely calculated automatically as you go.

Setup 3: VAT-registered micro business that insists on spreadsheets

Keep your spreadsheet records tidy and consistent, then use bridging software to submit VAT returns digitally. Build a routine for reconciling your spreadsheet to your bank statements regularly. Store digital copies of receipts in an organised folder structure or use a receipt app that supports your workflow.

Setup 4: Limited company director paying themselves and perhaps one employee

Use bookkeeping software for invoicing, expenses, and VAT (if registered), and add payroll either through an integrated payroll module or a separate payroll tool. Make sure the payroll entries flow into your accounts so your year-end numbers make sense without manual adjustments.

Setup 5: Micro construction business needing CIS

Select a toolset that explicitly supports CIS reporting, or partner closely with an accountant who can handle CIS submissions. Ensure subcontractor verification and monthly returns are manageable within the tool. CIS is one area where “basic” software can quickly become a headache if it lacks the right features.

Common mistakes very small businesses make when choosing HMRC-compatible software

Software selection errors aren’t usually about laziness; they’re about mismatched expectations. Micro businesses often buy tools under deadline pressure and discover later that the solution doesn’t fit. Here are the biggest pitfalls to avoid.

Buying for the future instead of the present

It’s tempting to pick software with every imaginable feature, thinking it will “grow with you.” But very small businesses benefit from simplicity. If the product is too complex, you may avoid using it, leading to messy data and higher accountant costs. Choose what you need now, and ensure you can upgrade later if required.

Assuming “invoicing software” equals “accounting software”

Some tools do invoicing beautifully but don’t handle VAT submissions, proper ledgers, or bank reconciliation well. Invoicing is only one piece of compliance. If you’re VAT registered, the VAT return requirement is the central point, so ensure your invoicing tool fits into an MTD-compatible bookkeeping flow.

Ignoring VAT scheme configuration

Even excellent software will produce the wrong results if VAT settings are misconfigured. This is especially important when moving from non-VAT to VAT registered status, changing schemes, or handling special cases like reverse charge. Take time at setup to get VAT codes right, and if you’re unsure, ask an accountant to review it.

Underestimating the value of bank feeds

Manually typing transactions is where errors and time losses multiply. Bank feeds and smart rules can transform bookkeeping from a monthly dread into a weekly 10-minute routine. For very small businesses, that time saved often outweighs subscription costs.

Overlooking the “admin workflow” beyond HMRC submission

Submitting numbers to HMRC is only one part of the process. You still need to collect receipts, chase invoices, manage cash flow, and track who owes you money. If the tool doesn’t fit how you work, you’ll end up running parallel systems and losing the benefits of going digital.

What about HMRC’s own tools?

Some very small employers and businesses use HMRC-provided tools for specific tasks, particularly around payroll for the smallest employers. Whether this is suitable depends on your needs, how many employees you have, and what features you require. HMRC tools may be adequate for basic compliance in limited scenarios, but they may not provide the broader bookkeeping functions that commercial platforms offer. Many micro businesses find that a commercial solution is still worthwhile because it integrates payroll with the rest of the business records.

How to decide quickly: a simple checklist

If you want a practical way to make a decision without overthinking it, work through this checklist. For very small businesses, this is often enough to reach a clear choice.

1) Are you VAT registered? If yes, prioritise MTD VAT submission. Decide whether you want full bookkeeping or bridging.

2) Do you run payroll? If yes, decide whether your bookkeeping tool has payroll that meets your needs, or whether you want a dedicated payroll tool.

3) Do you need CIS? If yes, make CIS support non-negotiable.

4) Will you use bank feeds? If yes, choose a platform with reliable bank connections and easy reconciliation.

5) How do you issue invoices? If you invoice regularly, choose software with simple templates, automatic reminders, and straightforward payment tracking.

6) How do you store receipts? If you hate paperwork, prioritise a good mobile receipt capture experience and the ability to attach receipts to transactions.

7) Do you work with an accountant? If yes, choose a system they can access easily or that exports reports they prefer.

8) What is your monthly budget? Be realistic. The cheapest tool is not always the cheapest outcome if it leads to errors and higher accountant time.

Examples of “best fit” recommendations by micro business type

Instead of naming specific products, it can be more useful to match your business type to the style of software that tends to work best. This keeps the guidance relevant even as vendors change their plans and features over time.

Freelancers and consultants

Look for a lightweight bookkeeping platform that handles invoicing, expense tracking, and bank feeds, with straightforward reporting for your accountant. If you’re not VAT registered, your needs may be simpler, but a tidy system still helps at tax time.

Tradespeople and mobile service businesses

Prioritise mobile usability: quick invoice creation on-site, easy receipt capture, and simple expense categorisation. Bank feeds can reduce admin dramatically. If you are VAT registered, ensure VAT coding is easy to apply and review.

Micro retail and e-commerce

Integrations matter. Choose software that can connect with your selling channels and payment providers to reduce manual sales entry and reconcile payouts accurately. VAT handling can be tricky when payment processors and marketplaces are involved, so clarity and reliable reconciliation tools are important.

One-person limited companies

You’ll typically want bookkeeping plus payroll (even if only for the director). The best fit is often a platform that keeps bookkeeping simple while allowing accountant access for year-end accounts and corporation tax. Make sure director payroll, dividends tracking (if relevant), and expense claims can be handled cleanly.

Side-hustles and part-time businesses

Don’t overbuy. Choose something easy that you will actually keep up with. If you’re not VAT registered and have no employees, you may only need basic income and expense tracking with good exports for Self Assessment.

Implementation tips for a smooth switch

Once you choose compatible software, the next challenge is adopting it without disrupting your business. For very small businesses, the goal is to get to a steady routine fast.

Start at the beginning of a VAT period or month: Switching mid-period can be done, but it increases the risk of duplication or missing transactions. If you can, align the switch with a clean cut-over date.

Connect your bank feed early: Importing and categorising historical transactions can take time. Some businesses choose to import only from a certain date and keep older records archived elsewhere, depending on their needs and accountant advice.

Set up VAT and invoice templates carefully: Small setup errors can create months of confusion. Take the time to confirm VAT codes, default rates, and invoice wording.

Build a weekly routine: For micro businesses, consistency beats intensity. A 15–30 minute weekly bookkeeping habit—categorising bank transactions, uploading receipts, chasing unpaid invoices—can eliminate the “deadline panic” cycle.

Get an accountant review if you’re unsure: Paying for a short review session can prevent costly errors. This is especially valuable if you’re VAT registered, dealing with construction CIS, or paying yourself through payroll.

So, what software is HMRC compatible for very small businesses?

For very small businesses, “HMRC compatible” software usually falls into one of three practical choices: a full bookkeeping platform that can submit VAT returns digitally (if you’re VAT registered), a bridging solution that submits VAT returns from spreadsheets (if you prefer spreadsheets), and payroll software that can submit RTI reports (if you have employees or run director payroll). Some businesses will also need CIS support, and some will benefit from receipt capture and integration tools.

The best path depends on your obligations and your preferred way of working. If you want the simplest ongoing experience, a full bookkeeping platform with bank feeds and MTD VAT submission is often the most efficient. If you are spreadsheet-driven and your records are simple, bridging software can be a cost-effective compliance route. If you have payroll obligations, ensure you have a solution—integrated or standalone—that handles RTI reliably. Above all, pick software you can maintain consistently, because the most compatible system is the one that keeps your records accurate all year, not just at filing time.