The next part of HMRC’s Making Tax Digital rollout comes into effect from 1st April 2021, with the majority of businesses unaware and unprepared. But what is a Digital Link and why is this step more import than Making Tax Digital to date?
Making Tax Digital for VAT
Making Tax Digital for VAT (MTD for VAT) came into effect on 1st April 2019 and required businesses with vatable income of £85,000 (or more) to submit their VAT figures digitally. This would require a piece of software or “bridging software” connected directly into HMRC’s systems to share the nine boxes of the VAT return. To help businesses with the change to the new system, the government set up a ‘soft landing period’ which meant that during that time, how the information arrived in these systems was irrelevant. In effect, HMRC moved the goalpost from typing nine figures into the Government Gateway to typing nine
9 figures into a piece of software, which probably added to business costs but didn’t fundamentally change the process. This soft landing period didn’t solve what HMRC were trying to achieve and was more of an introduction to what was to come, which is the linking of data through systems to HMRC in order to remove the risk of error from re-typing or cutting and pasting information.
Digital Links – what happens now?
Roll forward to 2021 and Digital Links is a more dramatic and imminent change. Many businesses invested early by transferring their full processes onto software compliant with MTD for VAT, either utilising a single piece of technology for all their financial processes or adopting different systems that were digitally linked. The businesses that didn’t do this are the ones that will now need to change.
In simple terms, from April 2021, all financial systems will need to be digitally linked. So, if you use multiple software packages to track your finances, or create your invoices in one piece of software but record the rest in another then you will need to make some changes to meet the submission requirements.
The three big issues are:
- Your software needs to be compatible with HMRC. VAT returns need to be submitted via the Application Programming Interface (API) platform, not via HMRC’s website.
- If your software is not compliant with MTD then you may need to install some bridging software which will allow you to connect a non-compliant system such as Excel, with HMRC.
- If you use more than one software package, then you need to link them so that all data is connected digitally with no manual breaks in the links.
The first two points were needed for Making Tax Digital in 2019 and the last one is required from 1 April 2021.
HMRC accepts that the following are digital links:
- emailing a spreadsheet containing digital records so the information can 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
- automated data transfer (potentially robot processing automation)
- API transfer
This list is not exhaustive. Please note that HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, either within a software programme or between software programmes, to be a digital link.
Misunderstandings and myths
These are a few examples to clear up some of the misunderstandings around this legislation:
- Spreadsheets are allowed – These can be used in full, or as part of the process. Digital Links will need to be in place and this can become cumbersome if a spreadsheet needs to be edited
- Manual adjustments are allowed – This is heavily caveated as supporting documentation/calculations are needed to support the adjustments and the adjustment has to be done via a digital process
- Bridging software is allowed – There is no intention to remove the use of bridging software and in some situations it is needed as commercially available finance software cannot cope with all circumstances
- Do till systems need to be linked – Retail schemes only need to record their daily gross takings, so recording this in the finance system is sufficient (which can be done manually). Underlying information from the till is not required to be digitally linked.
I can’t meet the deadline, so can I apply for an extension?
HMRC appreciates that businesses with complex or legacy IT software may require longer to get the Digital Links in place across all their software. These businesses can apply for an extension, but this extension will only be granted if specific criteria are met. To be considered for an extension you will need to:
- make a formal application to HMRC as soon as possible for an extension by requesting a form from mtdspecificdirections.hmrc.gov.uk
- explain why it is unachievable and not reasonable for you to have digital links in place by the MTD VAT digital links mandation date. For example: why does the commercial software currently available not meet the Digital Link requirements for your business?
- submit details of the systems that are unable to be digitally linked (provide a current map of your existing VAT systems, highlighting the exact areas that cannot be digitally linked)
- provide a clear explanation and timetable for when and how you will become fully MTD compliant (ordinarily no later than one year from the end of their soft-landing period)
- state the controls you will put in place to ensure any manually transferred data is moved accurately and without error
Do I need to do this? What happens if I don’t comply?
Yes, this is a legal requirement for all businesses that are VAT registered. You will need to ensure that the Digital Links are in place before the end of the soft-landing period. If you aren’t fulfilling your MTD responsibilities, then you will be liable to penalties or fines from HRMC.
How can Scrutton Bland help?
The impact of introducing Digital Links to VAT reporting will require businesses to make changes to their processes. For most this will come at a cost when they are already struggling financially. Smart business owners will use this requirement to assess their financial processes and make changes that bring in automation and reduce ongoing costs.
The Scrutton Bland System Advisory Service specialises in helping businesses transition to cloud products with a focus on flexibility, efficiencies and improved business reporting. They can help you meet the legal requirements regarding digital record keeping by reviewing your current software set up, helping you adopt software that is compliant, or helping you to apply for an extension with HMRC, whilst also streamlining your processes.