April 2019 saw the introduction of HMRC’s Making Tax Digital (MTD) scheme. This scheme became mandatory for VAT registered businesses with a taxable turnover greater than £85,000 and formed part of HMRC’s longer term strategy for all taxes to be submitted online.
HMRC cite several reasons for the introduction of MTD, with the main goal to make tax administration efficient and simple for taxpayers, ensuring taxes are correct, payments received on time, and errors and fraud prevented.
As part of fraud and error prevention, HMRC stated that any data transferred between software programmes must be carried out by a digital link. When MTD was implemented a soft landing period to April 2020 (subsequently extended to April 2021) was defined to allow businesses to ensure that their systems and processes were compliant with these requirements. Beyond April 2021 HMRC have stated that penalties will apply for non-compliance.
HMRC states that “MTD does not require you to keep additional records for VAT, but to record them digitally. Your digital records should include, for each supply, the time of supply (tax point), the value of the supply (net excluding VAT) and the rate of VAT charged. They should also include information about your business, including business name and principal business address, as well as your VAT registration number and details of any VAT accounting schemes you use.”
If you use software such as Xero to raise your invoices to customers, deal with your bills and payments, and do not keep any financial records for income and expenses outside of the software, then you do not need to take any action as you have no digital links to consider.
But if you have a till system to capture your daily takings or use a spreadsheet to capture income and expenditure, then you need to consider digital links. HMRC’s guidance is clear that “The information must not be physically re-typed into another software package.”
The list of what is considered ‘a digital link’ is quite extensive and is defined by the data being transferred electronically between software programs, products, or applications and that transfer is automated. Examples also include:
HMRC are clear that the use of cut and paste or copy and paste to select and move information within a program or between programs is NOT ACCEPTABLE and is seen as risky and prone to error.
Although HMRC have set the deadline as April 2021, extensions can be applied for and more detail found here. However, cost alone is not deemed a sufficient reason and “businesses are expected to make every effort to comply with the digital links requirements by the end of the soft landing period”.