woman and train

 

HMRC has confirmed there will be no further delays to the mandation of digital links under MTD for VAT so it’s full steam ahead

Originally due to come into effect from April 2020, the mandate was delayed due to the pandemic but from 1 April 2021 all eligible businesses must comply with the requirement. This date also signifies the end of the soft landing period, meaning any non-compliant businesses could potentially be fined.

The mandate states that digital links must be put in place between the source data (digital records) and the Return to create an end-to-end digital process (the returns process itself was digitalised in 2019). A digital link is the electronic transference of data between software and this must be automated. However, there are some exceptions to the rule such as around the various VAT schemes which means you can generally assume that the digital links requirement ends at the digital record and doesn’t apply to invoices.

Practical considerations

The digital links mandate has a number of implications for businesses as follows:

  1. Cut or copy and paste will no longer be allowed – which means any business manually transposing data will have broken the digital journey and be deemed non-compliant
  2. Spreadsheets must have a digital link – so that cells between different worksheets or workbooks are linked. Any formula errors or broken macros will break the link
  3. You’ll need to provide a digital audit trail – because any audited business must be able to evidence their compliance from source to report. This means that you’ll need to provide timestamped digital audit trails that detail how and when calculations were made
  4. Audit will be a prime focus for HMRC – increasing its compliance yield will be top of HMRC’s agenda to boost the VAT tax take. It already investigates approximately half of all large businesses at any one time. The tax authority has been promised additional resources in the form of new technology and 1300 additional compliance officers, suggesting efforts will ramp up.
  5. Source data collection will need to be automated – helping to ensure calculations, adjustments and amendments are more accurate.
  6. Flagging anomalies will be useful – reducing the time dedicated to preparation and review processes. Being alerted to issues within source data will enable adjustments to be made prior to calculation and submission

As businesses seek to interpret and apply the requirements to their own VAT processes, we’ve noticed some common queries are emerging. 

Q1. Can I use my existing bridging solution?

HMRC has stated that a bridging solution can be used to comply. For businesses with simple VAT processes that don’t manually manipulate their data this option makes sense. However, in the long term it’s unlikely to suit your needs if your business grows, for instance, or you wish to be alerted to potential issues or gain insights.

Q2. Can I defer to October 2021?

You can only apply for an extension if have one of two extenuating circumstances: you’re in the process of upgrading your IT systems to facilitate digital linking or have acquired a business and need to digitally link its records. You’ll then need to make a formal application which could be rejected so should take steps to comply even if seeking an extension.

Q3. How will I manage multiple trading entities, partial exemption/s or VAT Groups?

Dealing with large transaction volumes or complex adjustments can make it more difficult to comply. Many businesses are now using MTD to justify the automation of these elements and significantly reduce the time and resource needed to complete the Return.

Q4. Can you still make adjustments and amendments?

Some adjustments are outside of the scope of MTD so you only need to keep the total as a digital record. The calculation itself does not need to be linked but does need to be retained for VAT record keeping. Yet this can see errors creep in which is why it is advised that these are encompassed within the MTD software. Doing so then allows you to track back through the calculation and to prove compliance.

Q5. Can I use digital links to digitalise my tax processes and pave the way for more MTD reform?

Automation of tax processes will increase the accuracy and operational efficiency of the business. HMRC has also laid out a ten-year plan for reform of the tax system, including proposals for MTD for corporation tax. Digital links requirements are likely to be replicated for these other tax systems, so if the business has a ‘single source of truth’ data pool, this can be used to more efficiently complete these Returns.

Digital first, not compliance first

While it’s important to make sure you meet the digital links requirements, the real aim here by HMRC is to reduce the likelihood of errors and help businesses benefit from more accurate and productive processes. It’s for these reasons that we believe you need to think ‘digital first’ to identify the how MTD can help your business.

A digital compliance platform such as AlphaVAT can help you meet today’s compliance requirements while preparing you for a digital tomorrow. If you’d like to see how this technology works in action please contact us for a demo.

If digital links is still a dilemma for you, why not take our VAT Readiness Checker test at www.taxsystems.com or if want to find out more about the implications, download our Digital Links: A guide to MTD in 2021 whitepaper or sign-up for one of our Demystifying Digital Links webinars where we’ll be happy to answer your questions.