MTD: Time to get linked up
The final part of the Making Tax Digital (MTD) for VAT requirements becomes mandatory from April 2021 with the ending of the soft landing for digital links.
The requirement to have digital links between different pieces of software has proved problematic for some businesses, even where they are otherwise able to successfully meet their MTD obligations. In recognition of this, a two-year soft landing period was put in place which is due to expire soon. If they have not done so already, businesses need to take steps now to ensure they have digital links in place for their first VAT return period starting on or after 1 April 2021.
What is (and isn’t) a digital link?
One of the key requirements of MTD for VAT is that pieces of software have to be digitally linked to give a seamless digital journey from the records of a business through to the calculation and submission of their VAT return. There can be no manual transfer of data – a business cannot, for example, take a total figure from a spreadsheet or piece of bookkeeping software and type it manually into their VAT return software.
VAT Notice 700/22 sets out more detail as to what HMRC accept as being a digital link. This includes:
HMRC are quite clear that they do not accept the use of copy and paste, or cut and paste, to transfer information as being a digital link.
HMRC, however, do accept that not everything needs to be digitally linked. In particular, they recognise that certain calculations, for example capital goods scheme (CGS) adjustments, may need to be performed outside of software and then manually entered into the VAT return software.
Why are digital links proving tricky?
The digital links requirement is unlikely to cause many difficulties for businesses that use a single piece of software (or compatible pieces of software) to keep their digital records and complete and file their VAT returns. However, problems can arise where businesses use pieces of software which cannot easily be linked, in particular those that are bespoke, legacy or specialist in nature.
One example of this is found in veterinary practices, which often use specialist practice management systems to manage bookings, keep records, bill clients etc. It is quite common for such practices to then manually post totals from these systems into accounting software on a weekly or monthly basis – something which won’t be allowed once the soft landing for digital links expires.
What can businesses do?
Where businesses don’t already have digital links in place, then they need to take action before the expiry of the soft landing period in April.
The first step is to look at existing software and systems and establish exactly what needs to be linked. Not every piece of software used by a business may need to be linked – the starting point is the software in which the digital records required under MTD are recorded and the end point is the submission of the VAT return. There can be no manual transfers of data between those two points.
It is also worth noting that there are special rules for specific VAT schemes (such as retail schemes) which may prove helpful. More information can be found in VAT Notice 700/22. Once the business has identified exactly what needs to be linked, possible solutions, including the use of commercial bridging products, can be considered.
If a business believes it will be ‘unachievable and not reasonable’ to have digital links in place by the end of the soft landing period, it is possible to ask HMRC for extra time. However, as set out in paragraph 18.104.22.168 of VAT Notice 700/22, there are strict criteria which need to be met, and HMRC make it clear that cost alone is not a sufficient reason to request extra time.
If a business wants to pursue the option of extra time, they still need to take action now – a formal application has to be made to HMRC before the end of the soft landing period, and this will need to set out a clear explanation and timetable for when and how they will get the required digital links in place. Even where an application is successful, this will only provide a temporary reprieve as HMRC will grant an extension to the soft landing period and not a permanent relaxation of the digital links requirements.
Digital links, and how to achieve them, therefore need to be on the radar of all businesses which are subject to MTD for VAT well before the end of March.