Is MTD software an allowable expense? This was one of the most practical questions asked during a Coconut MTD webinar: “So is the cost of using MTD software an allowable expense?”

The short answer is yes — but the rules that govern it are worth understanding, because they also cover other accountancy costs you might be claiming. Here’s what HMRC says, which rules apply, and how to claim it.

The Short Answer: Yes, It’s Allowable

The cost of MTD-compatible accounting software (like FreeAgent, Account OS, Pie Tax, Coconut, or Sage) is an allowable business expense for sole traders and landlords. You claim it as a general administrative expense against your business income or property income.

For example, if you pay £20/month for Account OS:

  • Annual cost: £240
  • Tax saving at 20%: £48/year
  • Tax saving at 40%: £96/year

If you pay £30/month for Pie Tax:

  • Annual cost: £360
  • Tax saving at 20%: £72/year
  • Tax saving at 40%: £144/year

The saving partially offsets the cost of the software, making it cheaper in real terms.

The HMRC Rules That Apply

Two specific HMRC Business Income Manuals (BIMs) govern software and accountancy costs:

BIM35805: Software — Capital vs Revenue

According to HMRC’s BIM35805, the key question is whether software expenditure is capital (a one-off purchase of a long-term asset) or revenue (an ongoing operating cost).

  • Revenue expenditure (deductible against income): Software subscriptions, SaaS fees, cloud-based accounting software paid monthly or annually
  • Capital expenditure (claim via capital allowances): Outright purchase of software licences with a useful life beyond one year

In practice, almost all MTD-compatible software is sold as a monthly or annual subscription (SaaS model), which is clearly revenue expenditure. This means you can deduct the full cost from your business income in the year you pay it — no capital allowances needed.

For example:

  • FreeAgent at £19/month = £228/year → Revenue expense, fully deductible (10% off with this link)
  • Pie Tax at £32/month = £384/year → Revenue expense, fully deductible
  • One-off software licence for £500 → Capital expenditure, claim via capital allowances

BIM46450: Tax Return and Accountancy Costs

According to HMRC’s BIM46450, the cost of preparing your tax return and normal accountancy services is an allowable expense under longstanding practice (Statement of Practice SP 16/91).

This covers:

  • Accountancy fees — including bookkeeping, payroll, and general accountancy work
  • Tax return preparation — including Self Assessment and MTD quarterly updates
  • Tax advice — routine tax planning and compliance advice

The key distinction is between normal recurring costs (allowable) and exceptional one-off costs (may be capital). For example:

  • Annual accountancy fee of £800 → Allowable as a revenue expense
  • One-off fee of £5,000 for tax planning related to a business restructure → May be capital, not directly deductible

MTD software falls squarely into the “normal recurring costs” category — it’s a subscription you pay regularly to manage your tax obligations.

How to Claim MTD Software Costs

Claiming MTD software is straightforward:

For sole traders

  1. Record the software subscription in your accounting software as a general administrative expense
  2. Categorise it under “Office Costs,” “Software,” or “Accountancy Fees” — the exact category doesn’t matter for HMRC as long as it’s an allowable expense
  3. Keep the receipt/invoice — your monthly subscription email or invoice from the software provider is sufficient

On your Self Assessment (or MTD final declaration), the software cost is included in your total expenses, reducing your taxable profit.

Example: You’re a sole trader with £45,000 in turnover and £8,000 in expenses (including £240/year for accounting software). Your taxable profit is £37,000. Without the software subscription, your taxable profit would be £37,240 — so the software saves you £48 in tax at 20% or £96 at 40%.

For landlords

Landlords can also claim MTD software as an expense against their property income, according to HMRC’s property income guidance. If the software is used to manage rental records and submit MTD quarterly updates, it’s an allowable expense.

Example: You’re a landlord with £25,000 in rental income and £4,000 in expenses (including £240/year for accounting software). Your taxable rental profit is £21,000. The software portion saves you £48 in tax at 20% or £96 at 40%.

If you use the software for both business and personal purposes

If you use your accounting software purely for business, claim 100% of the cost. If you also use it for personal finance management (some software like Coconut allows this), you can only claim the business portion.

For example, if you use Coconut 80% for your sole trader business and 20% for personal finance tracking:

  • Monthly cost: £20
  • Claimable amount: £20 × 80% = £16/month
  • Annual claim: £192
  • Tax saving at 20%: £38.40
  • Tax saving at 40%: £76.80

In practice, most sole traders use accounting software exclusively for business, so 100% is claimable.

What About Setup and Migration Costs?

If you’re switching to MTD-compatible software for the first time, you may incur additional costs:

  • Data migration fees — some software providers charge to import your existing records
  • Accountant setup fees — if your accountant helps you set up the new system
  • Training costs — if you pay for training on the new software

These costs are generally allowable as revenue expenses if they’re modest and related to the normal running of your business. According to BIM35805, if the costs are significant enough to create a lasting asset (e.g., a custom-built system), they may be capital expenditure instead.

For most sole traders, setup costs are a few hundred pounds at most and are clearly revenue expenses. For example:

  • Accountant charges £300 to set up Pie Tax and migrate your records → Allowable expense
  • Software provider charges £50 for data import → Allowable expense

What About the Cost of an Accountant Under MTD?

If you use an accountant to handle your MTD quarterly updates and final declaration, their fees are allowable under BIM46450. This includes:

  • Bookkeeping services — recording income and expenses throughout the year
  • Quarterly update preparation — reviewing and submitting your quarterly updates
  • Final declaration preparation — preparing and filing your end-of-year return
  • General tax advice — routine compliance and planning advice

Typical accountant costs for MTD compliance range from £500–£2,000/year depending on the complexity of your business. All of this is deductible.

Example: You pay your accountant £1,200/year for MTD compliance (bookkeeping + quarterly updates + final declaration):

  • Tax saving at 20%: £240/year
  • Tax saving at 40%: £480/year
  • Net cost after tax: £960 (at 20%) or £720 (at 40%)

What If You’re Not Yet Mandated for MTD?

If you’re not yet mandated for MTD (your qualifying income is below the threshold), but you choose to use accounting software voluntarily, the cost is still allowable. The expense is incurred for the purpose of managing your business finances — it doesn’t matter whether MTD is mandatory or voluntary.

This means you can start using compatible software now, claim the cost as an expense, and be fully prepared when your MTD threshold date arrives. See our MTD qualifying income thresholds guide to check when you’ll be mandated.

In addition to the software subscription, you can claim other costs associated with MTD compliance:

  • Internet costs — if you use the internet for your business (including submitting MTD updates), you can claim the business portion. If your internet bill is £40/month and you use it 30% for business, claim £12/month = £144/year.
  • Phone costs — if you call HMRC or your accountant about MTD matters, claim the business portion of your phone bill. See our personal card for business expenses guide for how to record mixed-use costs.
  • Computer equipment — if you buy a laptop for managing your MTD records, claim it via capital allowances (AIA) if over £1,000, or as a direct expense if under £1,000.
  • Office costs — any stationery, printing, or other costs related to your record-keeping

The Bottom Line

MTD software is an allowable expense — there’s no ambiguity about it. The key rules are:

  1. BIM35805: Software subscriptions are revenue expenditure (fully deductible in the year you pay)
  2. BIM46450: Tax return and accountancy costs are allowable under SP 16/91
  3. Claim it as a general administrative expense on your Self Assessment or MTD final declaration
  4. Keep the invoice/receipt from your software provider
  5. If you use the software for personal purposes too, only claim the business portion
  6. Setup and migration costs are also allowable if they’re modest
  7. Accountant fees for MTD compliance are fully deductible

The cost of MTD software is partially offset by the tax relief — a £240/year subscription effectively costs £192 (at 20% tax) or £144 (at 40% tax) after tax relief.

For the full MTD overview, see Making Tax Digital for income tax explained. For practical guidance on quarterly updates, see our MTD quarterly updates guide. For the full list of allowable expenses, see our allowable expenses guide.

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