Making Tax Digital - Soft-landing period ends soon
In April 2019 Making Tax Digital (‘MTD’) was launched which requires businesses to maintain digital records and prepare and submit VAT returns digitally. With full digitisation it is HMRC’s view that errors will reduce which in turn should reduce VAT loss. HMRC accepted that this was a big change for business and allowed a soft-landing period for the first 12 months so that businesses were only required to retain records digitally and submit the VAT returns via compatible software rather than have a fully automated process. The soft-landing period comes to an end on 31 March 2020 (30 September 2020 for deferred businesses) and businesses need to take action to ensure they are complying and have the appropriate digital links in their VAT return process.
What is a digital link?
Once data has been entered into the accounting software or excel to create the digital record, any further transfer, recapture or modification of that data must be done using digital links. Essentially, there needs to be a full digital audit trail from the base data through to the VAT return with no manual transfer. HMRC’s description of a digital link is as follows:
‘a transfer or exchange of data is made, or can be made, electronically between software programs, products or applications. That is without the involvement or need for manual intervention such as the copying over of information by hand or the manual transposition of data between 2 or more pieces of software. This could be a transfer or exchange of data within a business (for example, between 2 systems) or a transfer of data to a tax agent in order that they can prepare a VAT Return or make a calculation (for example, a Partial Exemption calculation).’
Examples of a digital link
HMRC accepts that the following examples constitutes digital links:
- linked cells in spreadsheets
- 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 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
HMRC does not accept that cut/copy and paste qualifies as a digital link.
Are there any permitted manual processes?
The initial inputting of the data is likely to be manual and this is permitted. After this, HMRC does accept that there may certain calculations that need to be made outside of software on a separate spreadsheet (e.g. partial exemption or capital goods scheme adjustments) with manual input into the software that will submit the VAT Return.
What if I cannot link my process digitally?
If you cannot put the required digital links in place, HMRC may allow an extension but a specific direction must be applied for. To apply, a business will need to:
- make a formal application to HMRC before end of the soft-landing period (which comes to an end on 31 March 2020 (30 September 2020 for deferred businesses)
- explain why it is unachievable to not have digital links in place
- provide details of the systems used that cannot be digitally linked. A map of systems must be provided
- provide an explanation and timetable for when and how the business will become MTD compliant
- state the controls to be put in place to ensure any manually transferred data is moved accurately and without error.
Cost alone is not a sufficient reason to issue a specific direction.
Is bridging software still compliant with Making Tax Digital?
Yes! Businesses do not need to spend money on an accounting system if they are currently using spreadsheets. It is possible to continue using bridging software which uploads the spreadsheet and submits to HMRC. However, it is important to ensure that the VAT return is calculated digitally from the base data in the spreadsheet using linked cells or other acceptable formula to meet the digital link requirements.
How do I know if my process is compliant?
We are able to do a MTD readiness review which will walk through your current VAT return process from transaction entry to VAT return submission and will identifying the areas of the process that do not meet the new requirements and discuss the options available to you to make your process compliant.
If this is of interest, please contact our VAT partner below.