Having successfully filed your first MTD VAT submissions, now is the time to ask if you are prepared for the next phase. This will see the introduction of the digital link requirement for the transfer or exchange of data from systems containing the digital records to VAT calculation and return submission systems.
Organisations required to comply will need to ensure they have introduced new processes and systems to satisfy the digital link requirement by April 2021. This date also signifies the ending of the soft landing period which means businesses who have not made “every effort to comply with the digital links requirement” can expect to face penalties for non-compliance irrespective of whether or not their VAT return is correct.
So, what are the practical implications for organisations now looking to prepare their VAT returns? HMRC have clearly stated that ‘copy and paste’ for the transfer of data from the digital record to the VAT calculation spreadsheet or software will not be permitted. In the VAT Notice 700/22, the tax authority defines a digital link as the “transfer or exchange of data between software programs, products or applications” and states that “any further transfer, recapture or modification of that data must be done using digital links”. It’s a definition that supports a number of interpretations, so there are various ways businesses can comply. These include:
- Linked cells: data can be transferred between spreadsheets using formulas or macros but there is a high risk of links becoming broken and macros not being updated to reflect changes in the source data and or the calculation spreadsheet, resulting in the data being incomplete or out of date. Maintenance of bespoke spreadsheets is not only time-consuming, it leads to key man dependency. This in itself is a contributor to the high proportion of spreadsheets found to contain errors (94%) according to a research by Panko, 2009. Consequently, spreadsheets are often highlighted by auditors as a major source of risk.
- Import/export: outputting transaction data from source data digital records into a digital format such as XML or CSV. This is then imported into the calculation spreadsheet or software to form a compliant digital link. Similarly, the upload/downloading of files is also considered acceptable.
- Automated data transfer: data can be transferred between two systems within the business so can be taken direct from accounting/ERP systems and uploaded into MTD software. Once the digital data is within this compatible software it’s possible to make adjustments.
Compliance engines use this approach and include additional features such as audit trail, user permissions and access controls, workflow, data cleansing and notifications to alert the user to potential anomalies.
- Email/portable device: spreadsheets containing digital records can be sent via email or a portable device such as a memory stick, flash drive etc to a recipient for import into MTD software. However, this is risky, so the data should be encrypted and password protected to ensure that sensitive information does not fall into the wrong hands.
The aim of MTD is to close the tax gap by reducing the risk of errors in the compliance process. This is achieved by establishing a strong evidence chain between the transaction data and the submitted return while minimising manual intervention. In our opinion this reduction of risk in the compliance process is the true north that organisations should embrace at the heart of their MTD strategy.
As mentioned earlier, although spreadsheets give the impression of accuracy and integrity they are in fact highly prone to error due to the way they evolve over time, resulting in corrupted formulas, macros or links. These mistakes can be costly, incurring penalties and the scrutiny of HMRC, as well as calling into question the systems and processes of the business. For large organisations, this could increase the Business Risk Review score and trigger a VAT audit.
For these reasons, we recommend that MTD be regarded as an opportunity to revise your end-to-end compliance process and reduce any inherent risk.
Improving your processes by implementing a compliance engine such as AlphaVAT, protects the business by drawing in data direct from source into an environment where calculations are performed using encoded logic that is written and maintained by experts. An audit trail and corresponding reports track any necessary data adjustments in arriving at the final return values without contravening the digital links requirement. These include correcting data errors, identification of blocked VAT, the exclusion of transactions outside the scope and prior return corrections within the £10,000 limit.
Furthermore, an expert compliance engine offers scalability as the solution can grow with the business to meet further regulatory demand so that, should HMRC decide to follow the example set by jurisdictions such as Brazil and demand the submission of supplementary data such as the digital records used to make up the VAT Return, the business can readily comply.