Get ready for HMRC’s new digital linking rules, and boss MTD

Learn why cut-and-paste will soon end for Making Tax Digital for VAT, and find out what you need to do from April 2021

Making Tax Digital for VAT is back on the horizon, with digital linking rules changing from April. But the outcome will give you a greater chance to boss your business as you’ll make fewer errors and reduce the chance of receiving penalties.

Following the implementation of MTD for VAT in April 2019, HMRC provided a 12-month soft-landing period so businesses could ensure their systems were 100 per cent digitally linked to comply with the new requirements. However, the impact of coronavirus meant this was extended to 1 April 2021.

What is a digital link?

When using “functional compatible software”, any data that’s transferred or exchanged either within or between software programmes, products or applications needs to be digital where the information forms part of the digital records. Say you add some data into software that’s used for keeping and maintaining digital records. If you need to make an additional transfer, or recapture or modify the data, you must do so using digital links.

According to HMRC, a digital link is “where a transfer or exchange of data is made, or can be made, electronically between software programs, products or applications [...] without the involvement or need for manual intervention such as the copying over of information by hand or the manual transposition of data between two or more pieces of software.”

Digital links also apply if you’re using one piece of software. For example, values that are submitted to HMRC have to be digitally linked to the underlying records – you can’t overtype them.

So essentially, the cutting or copying and pasting of data will be prohibited – and continuing to do so could result in penalties.

Spreadsheets, manual adjustments and bridging software

When the soft-landing period ends, that doesn’t mean spreadsheets can’t be used for your VAT accounting. If they’re MTD API-enabled – they can record and submit digital transactions – they can be used alone.

If digital links are used, manual adjustments prior to submission are also still acceptable in some scenarios. HMRC recognises certain calculations, such as capital goods scheme adjustments, have to be made outside of software and entered manually. Then there’s bridging software. As long as digital links are in place and the software is used appropriately, it’s fine to continue using it.

A better way to boss your MTD digital linking

But spreadsheet formulas can break, while manually inputting data can lead to errors. And most bridging software works in a basic way.

There’s a more effective way to boss your digital linking obligations: use MTD-compatible accounting software that allows you to record and submit your MTD data from one place. Not only will you meet HMRC’s requirements, it will help you work efficiently, keep accurate records and save time and money.

Need to amend your processes to comply with the digital linking rules? Start the process now. And get in touch with HMRC, an accountant or a VAT specialist if you have any queries.

To find out how you can boss MTD, visit the Sage website

by Tom Ritchie, Product Marketing Manager, Sage