Making Tax DigitalMEET OUR Making Tax Digital TEAM
Making Tax Digital (MTD) is a Government initiative designed to transform the UK tax system. Currently, the Government has not widened the scope of Making Tax Digital beyond VAT, and MTD for income tax will not be mandated until 2021 at the earliest.
Making Tax Digital for VAT (MTDfV)
Under the MTD rules, most businesses will be required to keep VAT-relevant data in digital format and to use MTD-compatible software to transfer the required information directly to HMRC.
All VAT registered businesses with a taxable turnover in excess of £85,000 are now obliged to comply with MTD, and will therefore be required to do the following:
- Keep records in a digital format as required by the new regulations
- File their VAT return using MTD compatible software
What constitutes taxable turnover?
VAT taxable turnover is the total value of everything you sell within a 12 month period that is not exempt or outside the scope for VAT purposes.
What is MTD compatible software?
MTD compatible software is an application, that must be able to:
- Record and preserve digital records
- Provide to HMRC information and returns from data held in those digital records by using the API (Application Processing Interface) platform
- Receive information from HMRC via the API platform
MTD Latest updates
Get ready for HMRC guidelines regarding MTD digital links
When MTD first came into operation in April 2019, a 12 month ‘soft landing period’ was granted to businesses adopting Making Tax Digital for VAT (MTDfV) to get systems digitally linked.
In 2020, due to the pandemic, this soft-landing period was extended to April 2021 for every business making use of MTD for VAT.
From April 2021, Digital Links must exist between all programs that are used in your VAT compliance process.
What is a Digital link for MTD?
Ideally, businesses should use one “functional compatible software” for accounting and filing VAT returns under MTD. However, if a business uses more than one piece of software to comply with MTD, for example one to record the transactions and another to submit VAT returns, each piece of software or spreadsheet must be digitally linked to other pieces of software to create a ‘digital journey’.
A ‘digital link’ is the connection which facilitates the ‘digital journey’, where an exchange of electronic data is possible between software programs or applications.
HMRC accepts below as examples of digital links:
- APIs (Application Processing Interface) – This is the technology used when software or computers talk to each other to transfer data automatically
- XML, CSV import and export, and download and upload of files
- Emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation
- A digital link includes ‘linked cells’ (e.g. using a formula) in a spreadsheet
However, the use of ‘cut and paste’ does not constitute a digital link.
What if you cannot comply with Digital Links by April 2021?
Because of the disruption due to the pandemic, some businesses might continue to have issues converting their legacy IT systems to be ready before the end of the soft-landing period.
HMRC is allowing some businesses to apply to extend the soft-landing period beyond April 2021.
To be eligible, your business will need to:
- Make an application to HMRC as soon as possible for an extension and by no later than the end of the soft-landing period. You can email email@example.com to request an application form, with your business name and VAT Registration number.
- Explain why it is unachievable and not reasonable for you to have digital links in place by the end of the soft-landing period, for example, why does commercially available software not meet the digital link requirement 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 the soft-landing period)
- State the controls you will put in place to ensure any manually transferred data is moved accurately and without error
Extensions for complying digital link requirements are only intended to be issued under exceptional circumstances. Cost alone is not a sufficient reason to apply for an extension. In a situation like business acquisitions, it may take additional time to digitally link different software applications or packages to meet MTD legal obligations. In those circumstances, HMRC may consider an extension for the soft landing period.
For more information on what constitutes a digital link and for examples please refer HMRC VAT Notice 700/22 or click here.
We suggest you use a MTD compatible software directly without having to use bridging software with digital links.