Making tax digital for VAT legislation requires you to have “digital links” between your financial data and your VAT reports to HMRC. What changes might you need to make to your record keeping to achieve this? A “soft landing” delays the date that you need to have full digital links in place, but if you are asking “Has Making Tax Digital for VAT been delayed?” the answer is a resounding no.
VAT law offers no explanation of what it means by “digital links”. Despite this all VAT-registered businesses will be required use them in their bookkeeping processes. HMRC says digital links are where 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. The HMRC line is that digital links will make VAT reports more accurate and less open to accidental or deliberate errors.
Manual links aren’t permitted under Making Tax Digital for VAT (MTDfV). Noting down details from an invoice in one ledger and then using that handwritten information to manually update another part of the business functional compatible software is not acceptable.
This doesn’t mean you have to create invoices, delivery notes or other primary business records electronically. Paper documents are acceptable, despite what current TV ads for bookkeeping software imply. It’s what you do with the data on them which matters, i.e. how the information gets from an invoice to your VAT return.
If you have to operate your sales separately to Xero or other software, this can comply with Making Tax Digital for VAT. You will make your life much easier if you can combine everything in one system. Alterledger recommends that you use a cloud accounting system to record all your sales and costs in one place. This will avoid duplication of effort and reduce the likelihood of errors creeping into your accounts.
The question “Has Making Tax Digital for VAT been delayed?” has already been answered above. From your first VAT period starting on or after 1st April you will not be able to manually enter your VAT return on the HMRC if you are subject to MTDfV.
After you are obliged to join MTDfV, the submission of information to HMRC must always be via an Application Programming Interface (API). HMRC expects most businesses to use API-enabled commercial software packages both to keep digital records and file their VAT Returns. Xero is an approved software package. Alternatives to software include Bridging Software and API-enabled spreadsheets. Bridging Software and API-enabled spreadsheets introduce an extra layer of administration that would be unhelpful for many businesses.
Bear in mind that eventually you will need to submit tax returns under making tax digital too. If you have a bespoke system for your VAT, this will need to be extended when tax is brought into Making Tax Digital.
Using the example of a sales invoice; it is fine to enter the data manually into a bookkeeping app or a spreadsheet, e.g. Excel, but from there the data must flow automatically to your VAT returns. If you use a bookkeeping app which HMRC has approved for MTDfV, you can be certain that the data will digitally link when you press the button to produce and send your VAT return.
You might need to transfer your raw bookkeeping data to another person to work on, say your accountant.
HMRC will also accept digital links as:
This list is not exhaustive.
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.
If you use spreadsheets instead of an HMRC-approved bookkeeping app, the data must still link digitally. For example, a cell which shows the total of other cells, or another app, by using a formula is OK, but manually cutting and pasting from one or more cells to another isn’t.
Whether you use an app or spreadsheets, you’re allowed to make manual adjustments to your data if necessary. For example, if your business is partially exempt you’re allowed to manually work out the fraction of VAT you can reclaim.
For the first twelve months that MTDfV applies to you, at least, HMRC won’t enforce digital linking. This means you can wholly or partly use manual bookkeeping. However, as your VAT return data must be submitted electronically you will need to use digital links to your VAT return submission.
Our advice is to ignore the soft landing period and get to grips with digital links for all your data as soon as possible to avoid last minute changes when the soft landing ends.
Alterledger Ltd is registered with the Information Commissioners Office.
© 2023 Alterledger Ltd
Website by Haiwyre