Making Tax Digital: ‘Digital links’ compulsory from 1 April 2021

Since the introduction of Making Tax Digital (MTD) on 1 April 2019, HMRC have taken a ‘soft-landing’ approach to the ‘digital links’ part of the legislation.

From April 2021, the soft-landing period will cease and these digital links will be a mandatory requirement of the MTD legislation for all businesses currently enrolled (or required to be enrolled) for Making Tax Digital.

A digital link is a transfer or exchange of data which must be made electronically between software programs; in other words, a digital audit trail starting from the invoice being posted onto the accounting system through to the final figures on your VAT return. Each piece of software must be digitally linked to other pieces of software using an acceptable digital link.

Types of acceptable digital links include:

• Linked cells on a spreadsheet
• Emailing a spreadsheet
• Transferring a set of digital records onto a portable device such as a memory stick
• Importing data from spreadsheets or devices into software
• XML, CSV import and export, and download and upload of files
• Automated data transfer
• API transfer

Compliance

The use of spreadsheets and of bridging software is still acceptable and it’s not envisaged that their use will be ruled out by future amendments to the Making Tax Digital rules. In fact, where calculations such as partial exemption are required ‘off-system’, Excel is often the only or preferred solution.

Any spreadsheet produced, or exported from the accounting system, must follow the digital links rules – although it is acceptable to key in the results from off-system calculations into the accounting system by journal, for example. From 1 April 2021, the use of ‘copy and paste’ will no longer be allowed, and Excel must also be digitally linked to your bridging software.

Who does the change apply to?

At present, only compulsorily VAT registered businesses with a taxable turnover of more than £85,000 must enrol for Making Tax Digital – although it is possible to enrol voluntarily.

However, from 1 April 2022, all VAT registered businesses must sign up to Making Tax Digital irrespective of their turnover.

HMRC do have powers to charge penalties to VAT registrations not signed up to MTD at the correct time, and to businesses not complying with the new digital links requirements.

To find out more about our bridging software or how we can help your business become MTD compliant, get in touch with one of our advisors on 01903 234094.