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Last updated: 11 Mar 2021
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Making Tax Digital – Get ready for digital links

On 1 April 2021, the next stage of Making Tax Digital for VAT requires businesses trading above the VAT registration threshold ensure all parts of their VAT record-keeping systems are ‘digitally linked’

Last updated: 11 March 2021

In the first year after sign-up, (the ‘soft landing period’) the requirements of Making Tax Digital (MTD) were to keep VAT accounting records in digital form; and to use MTD compliant software to send VAT return information to HMRC, either via dedicated MTD compliant accounting software or bridging software. The deadline for digital links in software was delayed from 1 April 2020 to 1 April 2021 due to COVID-19.

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Linda Skilbeck

+44 (0)20 8037 3114
skilbeckl@buzzacott.co.uk
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Last updated: 11 March 2021

In the first year after sign-up, (the ‘soft landing period’) the requirements of Making Tax Digital (MTD) were to keep VAT accounting records in digital form; and to use MTD compliant software to send VAT return information to HMRC, either via dedicated MTD compliant accounting software or bridging software. The deadline for digital links in software was delayed from 1 April 2020 to 1 April 2021 due to COVID-19.

Changes from 1 April 2020

From 1 April 2021

A key part of the MTD regime is that the transfer and exchange of data between component parts of your ‘functional compatible software’ must be digital after the end of the soft landing period. This means that from 1 April 2021 all transfers or exchanges of data between software programs, products or applications must be made via ‘digital link’. This is so that each piece of software is digitally linked to other pieces of software to create the ‘digital journey’ and reduce human intervention.  

All VAT registered businesses trading above the VAT registration threshold are required to put digital links in place from 1 April 2021.

How do digital links affect accounting systems?

This does not mean the end of using low-cost bridging software to submit returns, if that is the best solution for you. The complete set of digital records to meet MTD requirements does not have to be held all in one place or in a single format. But the bridging product must be digitally linked through to the software (either your accounting package and/or spreadsheets) you are using to compile the VAT return, so that VAT returns are populated with numbers taken directly from your digital records. It’s this digital audit trail that will be essential in proving compliance with the digital links mandate. 

This means that you cannot ‘cut and paste’ or ‘copy and paste’ to move data, either within a software program or between software programs, or move or manipulate data manually, whether the transposition is to a spreadsheet or between spreadsheet cells. Nor can you send your VAT return data in PDF format to your agent to complete returns. 

What systems or program you employ will depend on individual requirements and will be influenced by the size and complexity of the business/charity, and the degree of digital capability, as well as the functionality you want from your software. For VAT groups, each VAT reporting entity or group member can keep their own digital records, but these must be digitally linked through to the group VAT return. 

Digital links

What is a digital link?

Digital links include:

  • linked cells in spreadsheets. For example, if a formula in one sheet mirrors the source’s value in another cell, then the cells are linked.
  • HMRC also accept that emailing a spreadsheet containing digital records, so the information can be imported into another software product, is a digital link;
  • 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;
  • API transfer.
Making VAT adjustments

Making VAT adjustments

Certain manual adjustments can still be made in separate Excel spreadsheets and only the total of the adjustment needs to be entered into functional software, with no digital link required. This applies to input tax adjustments for partial exemption and corrections of errors identified after an accounting period is closed. Business/non-business calculations and Capital Goods Scheme (CGS) adjustments are also permitted. 

Extensions to the deadline

Extensions to the deadline 

HMRC announced they would consider written requests for an extension to the 1 April 2021 deadline on a discretionary case-by-case basis where there were genuine reasons for non-compliance. An extension would only be granted in exceptional circumstances. Details of the criteria and how to apply were published in part 4 of HMRC Notice 700/22. Applications had to be made no later than the end of the soft landing period i.e. 31 March 2021. 

What should you do now?

What should you do now?

By now, VAT registered entities should have re-evaluated systems and program requirements and carried out an audit of the VAT return process to identify and correct any digital ‘gaps’ before the due date, or applied for an extension. Businesses who at this stage still think they will not be able to meet the deadline are urged to apply as soon as possible, as it is expected that HMRC will be instigating penalties for non-compliance in the near future.

How we can help
How we can help

Fill out the form below and a member of our VAT consultancy team will be in touch to assist you with any of your MTD questions. We often find that we can suggest changes to the use of existing software that can streamline the VAT reporting process. We can also help you to identify digital gaps and make submissions to HMRC.

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