As businesses prepare to file their first VAT returns under Making Tax Digital (MTD), many will already be fully compliant with the requirement to retain digital links, whilst others will be taking advantage of the ‘soft landing’ period provided by the UK tax authority, HMRC, to get fully compliant. So, what exactly are the digital link requirements, how can complex groups operating multiple accounting systems ensure that they comply, and what should businesses do now to prepare?
Digital records and digital links
The detailed requirements of MTD for VAT, including examples of what constitutes digital links for different scenarios, are contained in VAT Notice 700/22: Making Tax Digital for VAT which is worth reading, particularly if your organisation operates multiple accounting systems and/or uses spreadsheets as part of the VAT return completion process.
The basic principles of MTD are that VAT registered businesses with taxable turnover above the VAT threshold of £85,000 per annum are required to record and preserve digital VAT records and to submit VAT returns based on those digital records using functional compatible software. In many cases, a single software product will facilitate the digital record keeping and VAT return submission requirements. For example, a company using an accounting package to record all transactions is likely to be MTD compliant, providing that the software has been updated to allow for filing of the VAT return directly to HMRC using the API. For more complex scenarios, such as organisations with divisions which use different accounting systems, or where adjustments are required outside of the accounting system – for example for partial exemption calculations – each piece of software will not be able to satisfy all of the digital record keeping and submission requirements in isolation. In these cases, all of the systems, when taken together, form the digital records of the business.
Where an organisation’s digital records are maintained across multiple systems, any data transfer within and between systems must be digital. But what is a digital link? The VAT notice contains examples, including API transfer, automated transfer and, probably the most common method in practice, the use of export/import files. Another way to think about digital links is that once an item has been entered into the system, for example a sale or purchase, it should not be re-entered or ‘copied and pasted’ between systems by human intervention.
Most systems will be capable of exporting data as an Excel spreadsheet or CSV file. Providing the data receiving system can accept it in this format, and there is an appropriate mapping in place, then digital links can be preserved and MTD compliance can be achieved. Links do not need to be automatic between systems or technically sophisticated, providing there is no ‘copy and paste’ or manual re-entry involved. The key objective here is to eliminate the risk of human error associated with manually transferring figures between systems.
HMRC recognise that businesses may need time to establish digital links between systems and therefore for the first year for which MTD is mandatory, businesses will not be required to have digital links between software programs and will be permitted to ‘copy and paste’ or ‘cut and paste’ figures between systems. Most businesses will therefore need to have digital links in place from the start of the first VAT return period starting on or after 1 April 2020. Businesses for which the start date of MTD was deferred to 1 October 2019, for example entities that are members of a VAT group, will therefore have until the start of the first VAT return period starting on or after 1 October 2020 to establish digital links.
Spreadsheets can be digital records
If a business’ accounting records are maintained in a spreadsheet then the data in that spreadsheet can qualify as digital records, however care needs to be taken when data is transferred to or from a spreadsheet. For example, if a company uses accounting software and then copies and pastes data from that system into a spreadsheet, the spreadsheet ceases to be digital records because there is no digital link between the accounting software and the spreadsheet. The use of spreadsheets can be a useful way of ensuring compliance with digital record keeping for dormant entities or holding companies which do not maintain records in accounting software but have a small number of transactions. It is also worth noting that where spreadsheets are used as part of a wider system, the use of macros and linked cells to transfer data are acceptable digital links.
What businesses should be doing now
Businesses which do not currently maintain digital links between their systems should investigate the options available for exporting and importing data, including the mapping capabilities of the systems which are to receive the data. Where spreadsheets are used as part of the process, analysis should be undertaken to determine how data gets into and out of those spreadsheets and conclude whether these qualify as digital links. A useful way to undertake this analysis is to start at the end point, with the software or API enabled spreadsheet which will be used to submit to HMRC, and work backwards to trace how data is transferred into that software and, if relevant, how data is transferred between each of the systems working back to the source digital records.