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Making Tax Digital (MTD) – Are you prepared for the next stage of MTD – Digital Links?

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HMRC’s soft landing approach for MTD digital link requirements has now come to an end and therefore the next phase of MTD takes effect this month, for VAT return periods starting after 1 April 2021. The new rules will require a ‘digital link’ between all software used by the organisation for its VAT compliance.

What is a digital link?
A digital link is an electronic or digital transfer or exchange of data between software programs, products or applications. HMRC explain that every piece of software must be digitally linked to other pieces of software to create a ‘digital journey’. There should be a clear digital audit trail from the transactional data recorded in your accounting systems, all the way through to the VAT return numbers submitted to HMRC.

In other words, there must be digital links between each of the software programmes and products you use to complete and file your VAT returns. HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, either within a software program or between software programs, to be a digital link.

HMRC accepts there will be situations where manual adjustments must be made to calculate the correct amount of VAT. For example, partial exemption calculations, capital goods scheme adjustments, and import VAT recovery. These calculations can be done outside of the software used to keep the digital records. A journal entry can then be made to the software used to submit the VAT return data to HMRC.

You can continue to use Excel Spreadsheets after April 2021; however, you will need to ensure a digital link is in place between any accounting software and the spreadsheet to provide an uninterrupted digital journey to HMRC.

Next Steps
The new MTD phase requires organisations to have compliant processes in place, and they should begin their preparations by reviewing the processes and controls for preparing their VAT returns. Questions to be considered are as follows:

  • What are the different sources of data used to produce the VAT return?
  • How does the data come together?
  • Where data is downloaded from a system, what adjustments are subsequently made?
  • Is there a review process during the preparation of the VAT return? If so, how do any changes identified by the reviewer feed through to the VAT return data and digital records maintained in the accounting system(s)?
  • If a 3rd party firm is involved in the VAT compliance process, how is data transferred to them? What happens if they propose adjustments to the VAT return data?

If you have any questions relating to MTD for VAT or require a review of your systems to establish whether they are digital link compliant, please get in touch with the VAT team at BHP.