What Is Cloud Accounting?

What Is Cloud Accounting?

Cloud accounting is the use of accounting and bookkeeping software that is accessed over the internet rather than installed on a single computer. Your financial data is stored securely online and updates in real time, allowing business owners, finance teams, and accountants to view and work from the same figures simultaneously.

In practical terms, this removes the need for emailing spreadsheets, manually backing up files, or waiting until month end to understand your numbers. Whether you log in through a web browser or mobile app, cloud accounting ensures that your income, expenses, tax position, and cash flow are always up to date.

For UK businesses, cloud accounting has moved from a convenience to a necessity. It supports digital record-keeping, real-time reporting, and seamless collaboration with advisers, while also helping businesses comply with HM Revenue & Customs (HMRC) regulations.

In particular, cloud accounting plays a central role in meeting Making Tax Digital (MTD) requirements, which mandate that VAT-registered businesses keep digital records and submit VAT returns using MTD-compatible software. Most modern cloud accounting platforms are designed specifically to meet these standards, reducing the risk of errors and penalties.

Professional bodies such as the Institute of Chartered Accountants in England and Wales (ICAEW) consistently highlight cloud accounting as a key enabler of better financial visibility, stronger controls, and improved decision-making for small and growing businesses.

As cloud accounting continues to evolve, it is increasingly being integrated with bank feeds, invoicing tools, payroll, and tax reporting systems. This creates a single, connected financial ecosystem that reduces admin, improves accuracy, and gives business owners greater confidence in their numbers.

Cloud Accounting in Plain English

The easiest way to understand cloud accounting is to think of it like online banking, but for your entire business finances. Instead of logging in just to check balances, you are managing invoices, expenses, tax, and reports in one secure online system.

• Invoices and receipts are created, captured, and stored digitally, removing the need for paper files or manual data entry.
• Bank transactions are pulled in automatically using secure bank feeds and matched to invoices and expenses, reducing errors and saving time.
• VAT returns and financial reports are generated from live data, meaning figures are always current rather than weeks out of date.
• Your accountant can securely access the same dashboard, with permissions you control, to review records, correct issues, and provide proactive advice.

The “cloud” simply means the software provider hosts the system for you. There is nothing to install or maintain locally. You log in securely from anywhere with an internet connection, whether that is your office, home, or on the move.

Why UK Businesses Are Moving to Cloud Accounting

1) Real-time visibility, not end-of-month surprises

With automated bank feeds and daily data updates, cloud accounting gives you a clear view of your financial position at any time. You can see cash flow, upcoming bills, overdue invoices, and profit trends without waiting for month-end bookkeeping to be completed.

This level of visibility allows business owners to make better decisions earlier, whether that is managing cash flow, planning tax liabilities, or spotting issues before they become costly problems.

2) Easier collaboration with your accountant

Instead of sending spreadsheets or exporting files, cloud accounting allows you to grant secure access to your accountant. This enables them to assist with reconciliations, VAT reviews, compliance checks, and year-end accounts in real time.

Because both parties are working from the same live system, errors are reduced, queries are resolved faster, and advice can be given proactively rather than after the fact.

3) Designed to support Making Tax Digital (MTD)

Cloud accounting plays a central role in complying with Making Tax Digital. MTD for VAT requires businesses to keep digital records and submit VAT returns using compatible software, rather than manual spreadsheets or paper records.

HM Revenue & Customs (HMRC) publishes guidance and maintains a list of software products that are compatible with MTD for VAT, helping businesses choose systems that meet regulatory requirements.

MTD for Income Tax is also being introduced in phases. From 6 April 2026, it will apply to self-employed individuals and landlords with qualifying income above set thresholds, with further expansion planned. From 6 April 2028, the threshold is expected to reduce to over £20,000, in line with current HMRC policy announcements.

Using cloud accounting software early helps businesses prepare for these changes, ensuring records are already digital, structured, and submission-ready well before deadlines apply.

Cloud Accounting vs Spreadsheets vs Desktop Software

Choosing the right accounting system depends on the size, complexity, and future plans of your business. While spreadsheets and desktop software still exist, cloud accounting has become the preferred option for most UK businesses due to automation, compliance support, and flexibility.

Cloud accounting

Best for: Most small and growing UK businesses that want automation, live bank feeds, remote access, and simpler compliance with UK tax requirements.

Cloud accounting software automatically pulls in bank transactions, keeps records up to date in real time, and allows business owners and accountants to collaborate in the same system. This makes it particularly well suited to businesses that want visibility, scalability, and fewer manual processes.

Trade-offs: There is an ongoing subscription cost, and access depends on a reliable internet connection. For most businesses, the time saved and reduced risk of errors outweigh these drawbacks.

Spreadsheets

Best for: Very small or simple businesses with low transaction volumes and strong spreadsheet discipline.

Spreadsheets can appear cost-effective at first, but they rely heavily on manual input and consistent processes. As a business grows, spreadsheets often become harder to manage and more prone to errors.

Risks: Version control issues, manual calculation errors, limited audit trails, and additional effort required to maintain compliant digital records where Making Tax Digital rules apply.

Desktop accounting software

Best for: Niche situations where businesses have strict local IT policies, limited internet access, or legacy systems that cannot easily move online.

Desktop software is installed on a specific device or local server, which can restrict access and slow collaboration. Updates and backups are typically handled manually or less frequently than with cloud-based systems.

Trade-offs: Collaboration with accountants is more cumbersome, software updates can be clunky, and access is far less flexible compared to cloud accounting.

Quick comparison