From 1 April 2019, Making Tax Digital (MTD) compliance became mandatory for most VAT registered businesses for VAT return reporting. HMRC implemented a soft-landing period for the first two years, up to April 2021, meaning that some elements of the MTD legislation were relaxed – in particular – digital links.
For VAT periods beginning on or after April 2021, VAT-registered organisations with a taxable turnover above the VAT threshold (currently £85,000), will need to maintain all accounting records digitally within ‘functional compatible software’. This is a software program, or various software programs, which can not only maintain digital accounting records, utilising digital links, but also generate the VAT returns and submit them to HMRC.
What are digital links?
A digital link is essentially the exchange or transfer of information from one application to another on a digital or electronic basis. Each piece of software you use for VAT accounting purposes must link to one another without manual intervention. Once data has been entered into software used to keep and maintain digital records, any further transfer, recapture or modification of that data must be completed using digital links. For example, copying and pasting from a spreadsheet into a system used to submit VAT will no longer be compliant as it involves manual input. Digital links have been introduced to reduce the chances of error between systems.
What are compliant digital links and how do you prepare?
Compliant digital links remove the need for manual transfer of data between systems. For example, if you use more than one piece of software to record VAT information, such as one system to record sales entries and a separate one to record purchases – how do you ensure all systems work together?
HMRC have confirmed that they will accept the following as digital links:
– emailing a spreadsheet containing digital records so the information can be imported into another software product
– formulaic linked cells within a spreadsheet
– transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to someone else who then imports that data into their software
– XML, CSV import and export, and download and upload of files
– automated data transfer
– Application Program Interface (API) transfer
HMRC has confirmed this is not an exhaustive list, so other solutions may be suitable, however they will be subject to HMRC approval.
Until 31 March 2021, HMRC considers cutting/copying and pasting of data, for example, from one application to another, to be a compatible digital link. However, from 1 April 2021, cutting/copying and pasting will longer be MTD compliant, and businesses still using this method could face penalties.
Can you apply for an extension to the digital links deadline?
Setting up appropriate digital links between systems can take time to implement and test – if you haven’t already addressed this for your business, we would urge you to prioritise this now to be ready in time for 1 April 2021.
HMRC has confirmed that it is possible to apply for an extension to the digital links deadline, but this will only be considered if your business meets specific criteria and will be assessed on a case-by-case basis.
Find out more about Making Tax Digital for VAT here.
How we can help
If you have any questions in relation to becoming MTD compliant, (including reviewing your current VAT procedures, guiding you towards a suitable solution, assisting with quarterly submissions to HMRC and even providing training for your team), please contact firstname.lastname@example.org or call 01254 958008.