A keystone of HMRC’s Making Tax Digital for VAT (MTD) regime is that the transfer and exchange of data between what HMRC define as “functional compatible software” must be digital whenever that data remains a component of the business’s digital records. This is to maintain a wholly digitally linked audit trail between systems.
When the MTD legislation was introduced, HMRC offered businesses a soft landing period of up to one year to incorporate digital links from the date they became obliged to adopt MTD. During this period, businesses wouldn’t be liable for non-compliance penalties. In practice, this meant:
- Businesses required to apply MTD for VAT periods from 1 April 2019 must have digital links in place for the first VAT period starting on or after 1 April 2020 (i.e. soft landing ends 31 March 2020);
- Businesses required to apply MTD for VAT periods from 1 October 2019 must have digital links set up for the first VAT period starting on or after 1 October 2020 (i.e. soft landing ends 30 September 2020).
A further lifeline
Due to feedback on the difficulty in applying the new rules, HMRC recently announced it would consider written requests for an extension on a discretionary case-by-case basis where there are genuine reasons for non-compliance (for example, those operating large corporate groups with disparate legacy systems). However, it’s clear an extension will only be granted in exceptional circumstances and businesses will need to have:
- Approached HMRC as soon as they realised they wouldn’t meet the digital links requirement, and requested an application before expiry of their soft landing deadline
- Provided a detailed explanation why the requirement can’t be met by that deadline
- Provided details of software that can’t be digitally linked, along with a blueprint/process map showing how all systems are currently linked
- Offer a calculated timeframe by which the digital link requirement should be met (which must be no later than 12 months beyond expiry of their soft landing period) and
- Explained what actions, processes and controls will be set up to ensure data handled manually in the meantime will be transmitted accurately.
After review, HMRC will either reject the request or grant a written Direction extending that “soft landing” period by up to 12 months.
What might constitute a genuine reason:
- A component part of one piece of software can’t import/export data from other software and it can’t be updated or replaced by the soft landing deadline
- The business is in the course of updating or replacing its ERP and the expected implementation date is after the deadline.
What wouldn’t be considered a genuine reason:
- Business leadership hasn’t signed-off system changes (unless this is for reasons such as those given above)
- The cost of replacing/updating systems or components is deemed too expensive.
Key action points
- Know when the soft landing period for digital links comes to an end. It could be as early as 1 April 2020
- If digital links haven’t yet been set up to HMRC’s requirements, businesses should re-evaluate program requirements and timelines. Digital links do not include programs or processes that involve ‘cutting and pasting’ of data
- If you don’t think the “soft landing” deadline will be met, then gather evidence to support an extension. Contact HMRC before the deadline. (HMRC recommend they contact their Customer Contact Manager initially if one has been assigned, or the MTD Specific Directions Team).
- There’s no penalty for requesting an extension. The request can be withdrawn at any time. It’s important to continue working towards the digital link requirements in the meantime
- Finally, ensure any commercial solutions that might be able to resolve system gaps have been explored.
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