How to comply with HMRC digital links requirements for MTD for VAT

For businesses mandated into Making Tax Digital (MTD) for VAT from April 2019, HMRC granted a twelve-month ‘soft landing period’ to allow businesses time to get their systems digitally linked so they are complying with the full MTD for VAT requirements. However, due to the impact of Coronavirus on UK businesses, this period was extended to 31 March 2021. The ‘soft landing period’ allowed businesses to use ‘cut and paste’ to move data from one system to another and was accepted by HMRC as a suitable method during this period. 

What changes from 1 April 2021?

As per VAT Notice 700/22,  VAT return periods beginning on or after 1 April 2021, digital links between the return figures submitted and the VAT transactions supporting those figures will be required. This means that HMRC may require evidence of totals calculated automatically via formulas and linked cells in a spreadsheet, for example.

What is a digital link?

Once transactional data is entered into a software package, any further transfer or modification of that data must be done without manual intervention. This means that if the data needs to be transferred to a different software package, it has to be done without copying/pasting or retyping. The software used must be linked digitally – this applies to transferring of data between, for example, bookkeeping software and a spreadsheet. HMRC effectively require a digital audit trail from the source accounting system through to submission of the VAT return. Only certain adjustments such as for partial exemption and margin schemes are permitted outside the digital framework.

What HMRC consider a digital link is surprisingly inclusive.

Examples of digital links accepted by HMRC are:

• Emailing a spreadsheet for information to be imported into another software product.

• 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.

• API (Application Programming Interface) transfer – this is the technology used for systems to directly link and transfer data.

What if you use more than one piece of software?

In theory, MTD for VAT requirements can be met by using a number of software packages, including spreadsheets, provided they are digitally linked. Therefore, for example, a business could record sales and purchases in a bookkeeping package and transfer the figures to a spreadsheet that calculates the figures for the nine VAT return boxes before sending the information to bridging software to submit to HMRC via the approved API software.

Is TaxCalc’s VAT Filer compliant?

Our VAT Filer bridging software meets HMRC’s requirements for being listed on their software supplier list and is fully compliant with the MTD for VAT regulations. VAT Filer provides an incoming digital link by allowing businesses to import data held in a spreadsheet into the nine VAT Return boxes. From there, the information is sent digitally, via APIs, to HMRC’s MTD system. TaxCalc also provides for the ability for post-import adjustments to cater for items such as partial exemption and the margin scheme.

When using spreadsheets to collate VAT transactions, the link between the transactions totals and the total amounts to be reported in boxes 1 to 9 is now required to be digital, with no manual intervention (such as cut and paste). We have prepared examples of how individual transactions could be recorded and linked through to a summary page which could then be imported into VAT Filer.

To view or download one of our examples, click on TaxCalc Spreadsheet Transaction Templates

Can businesses request an extension to the soft landing period?

Some businesses with very specific circumstances can apply to continue being less than fully digitally linked. Businesses may be eligible on the following basis:

• The business uses complex or legacy IT systems meaning digital linking is genuinely not possible by April 2021.

• A recent acquisition of another business will not allow everything to be digitally linked in time.

HMRC require a formal application for an extension past April 2021, and a process map needs to be drawn up (examples are in VAT Notice 700/22) together with detailed explanations as to why digital linking is not possible at this stage, and when it will be fully compliant!