HMRC’s Plan to Tighten Standards for Third-Party Tax Software: What It Means for Directors Who Rely on Apps and Cloud Systems 

The Growing Reliance on Tax Software and Why It Is Now Under Scrutiny 

Many directors today rely heavily on cloud-based accounting platforms and third-party tax software to handle VAT returns, payroll, corporation tax submissions and more. These tools have made compliance faster and more accessible. But they have also introduced a new category of risk that HMRC is actively moving to address. 

HMRC’s ongoing programme to tighten the standards applied to third-party tax software is not just a technical matter for software developers. It has real implications for the directors and businesses that use these products, particularly if errors or non-compliant submissions have already been made. 

What Changes Are Coming? 

HMRC has been working through its Making Tax Digital programme to establish clearer requirements for software that interacts directly with HMRC systems. The direction of travel includes: 

• Mandatory functional standards for software that submits returns or accesses taxpayer data via HMRC’s API infrastructure 

• Tighter requirements around how data is processed, stored and verified before submission 

• Greater accountability for software providers whose products generate or transmit inaccurate information 

• Stronger audit trail requirements so that submissions can be traced back to source data more reliably 

HMRC has published guidance on these requirements through its Making Tax Digital resources on the HMRC official website. It is worth noting that this is not simply the government being generous with information; HMRC goes to great lengths to maintain the website and its incumbent tools precisely so that existing company directors, and those looking to form a company, have the ability from the word go to be compliant in every regard. The standards are expected to become more stringent as the programme matures. 

Why Directors Cannot Simply Rely on Their Software Provider 

This is the part that matters most for directors. If your VAT returns, payroll submissions, or corporation tax filings have been prepared and submitted via third-party software and those submissions turn out to be inaccurate, the responsibility does not automatically shift to your software provider. 

HMRC’s position is clear: the legal obligation for accurate and timely returns rests with the taxpayer, not with the tools used to prepare them. A director who discovers that their accounting software has been submitting incorrect VAT figures cannot simply point to the software as the source of the problem and expect HMRC to accept that as a full defence. 

This creates a genuine compliance risk for businesses whose finance function has been largely delegated to automated cloud systems without adequate human oversight. 

Common Problem Areas

Directors should be aware of the types of errors that have arisen in practice when tax software systems do not perform as expected: 

• VAT rounding errors that accumulate over multiple periods and result in an understated liability 

• Incorrect treatment of partial exemption calculations in automated systems 

• Payroll software that misapplies tax code updates or fails to process HMRC notifications correctly 

• R&D tax credit calculations that rely on software-generated figures without proper human review 

• Corporation tax submissions that do not correctly reflect adjustments required under current law 

What Directors Should Do to Protect Themselves 

The tightening of standards for third-party software is an opportunity for directors to review their own processes before any compliance issue arises. Some practical steps: 

1. Review whether the software you use is fully compliant with current HMRC standards and the Making Tax Digital requirements 

2. Check that someone with appropriate knowledge is reviewing software-generated submissions before they are filed 

3. Keep records of the data that feeds into your submissions in case you need to reconstruct figures later 

4.  If you suspect that past submissions may have been inaccurate, take advice before approaching HMRC, as the manner in which errors are disclosed affects the penalty outcome 

5. Do not assume that an HMRC-recognised software product is error-free; recognition confirms compatibility, not accuracy in every case 

The Penalty Risk From Software-Generated Errors 

If HMRC opens an enquiry and finds that returns submitted via third-party software contain errors, it will assess penalties based on the behaviour category it applies to the inaccuracy. The key categories are careless, deliberate, and deliberate and concealed. 

A director who can show that reasonable care was taken, even if using automated tools, is in a better position than one who cannot demonstrate any oversight at all. Getting the behaviour category right is important because penalties can range from minimal to a significant percentage of the additional tax due.

For specialist advice, please contact an adviser as soon as possible. For official HMRC guidance, visit the HMRC official website. 

FAQs 

Q1: If my software made an error, can I blame the software provider? 

HMRC treats the taxpayer as responsible for the accuracy of their returns, regardless of the tools used. You may have a separate commercial claim against your software provider, but this does not reduce your tax liability. 

Q2: How do I know if my software meets HMRC’s updated standards? 

Check with your software provider and review HMRC’s Making Tax Digital guidance on the HMRC official website. If you are unsure, a specialist adviser can carry out a compliance review. 

Q3: What should I do if I think past returns may contain errors? 

Take specialist advice before approaching HMRC. How and when you disclose errors affects the penalty outcome significantly. 

Q4: Does this affect small businesses as well as larger companies? 

Yes. The standards apply across all businesses using Making Tax Digital-compatible software, regardless of size. Directors of smaller companies often have less oversight in place, which can increase the risk.