Making Tax Digital for VAT – a simple guide to digital links.

29th January 2020

UPDATE: 6 APRIL 2020

The requirement to have digital links in place has now been postponed until 1 April 2021 as announced by HMRC as a result of the coronavirus pandemic.

However, for VAT groups and other businesses that were allowed to defer entry into the MTD regime until October 2019 (and therefore required to have digital links in place by October 2020) will only have an additional six months to comply and will also be required to meet the 1 April 2021 deadline.

1 April 2020 marks the first anniversary of Making Tax Digital (MTD) for VAT, which has required VAT registered businesses with a turnover of more than £85,000 to file their VAT returns using a digital application. 

Technically, it’s been a requirement to have ‘digital links’ since the launch of MTD, however during the first year, HMRC implemented a ‘soft landing’ and there was no legal obligation to have a fully digitised VAT accounting system. As such, businesses could copy and paste data from one system to another and HMRC has accepted this.

Making Tax Digital

 

The soft landing period will now end on 1 April 2021. This means no more typing-up figures, manual corrections or copy and pasting from spreadsheets. Digital links must be in place across all parts of the compatible software, yet, many businesses are still relying on this process.

What is a digital link?

A digital link is pretty much what it says on the tin. It’s a link between two digital places that allows data to be transferred between them, theoretically without human intervention. This could be a transfer or exchange of data within a business (for example, between two systems) or a transfer of data to your accountant so that they can prepare a VAT Return or make a calculation.

Examples of digital links are:

  • Linked cells in spreadsheets, for example, if you have a formula in one sheet that mirrors the source’s value in another cell, then the cells are linked.
  • XML, CSV import and export, and the download and upload of files
  • Automated data transfer
  • API transfer - API stands for Application Programming Interface which is a software intermediary that allows two applications to ‘talk’ to each other. 

When do I need to have digital links in place?

You have until your first VAT return period starting on or after 1 April 2021 to put digital links in place.

Please see the update at the start of this blog from 6 April 2020.

Is it possible to apply for an extension?

HMRC accept that, for a small number of businesses, further time may be needed but you must fit one of the following, specific criteria:

  • You have a complex IT system that may require a longer period to put digital links in place across your software.
  • You have acquired another business and to digitally link everything is impossible before the deadline.

My business fits the criteria for an extension, how do I apply?

To be considered for an extension, you will need to:

  • Make a formal application to HMRC as soon as possible for an extension before your deadline
  • Explain why it is unachievable for you to have digital links in place by the deadline
  • Submit details of the systems that are unable to be digitally linked
  • Provide an explanation and timetable for when and how you will become MTD compliant
  • Outline the controls you will put in place to ensure any manually transferred data is moved accurately and without error.

Whilst the soft launch of MTD has allowed businesses to adjust to the changes without the fear of receiving a penalty, fines will soon become a reality. The easiest way to avoid falling foul to these charges is to use a fully compatible digital software, or API enabled software that can read data from an excel spreadsheet. If you think this is something that your business may be affected by, then please speak to Jessica Mason at Jessica.Mason@hboltd.co.uk