Putting in place digital links to meet the second phase requirements of MTD for VAT may seem straight forward but applying digital links throws up a host of questions. You need to think again about processes you did manually but then how do you carry out amendments? Are you allowed to manually bring together group and entity data? Will digital links complicate matters with the introduction of even more formulas in overladen spreadsheets?
Firstly, let’s consider how digital linking is defined. HMRC says digital linking entails the “transfer or exchange of data between software programs, products or applications” so that “each piece of software… [becomes] digitally linked to other pieces of software to create the digital journey”. This means digital linking aims to create an end-to-end digital process to reduce human intervention and therefore the prospect of error. It’s an approach that should streamline the reporting process in the long run but for now businesses are having to grapple with what they can and can’t you do under digital linking.
What you can’t do
Manually prepare the return: Yes, you have a digital submission solution in place but it will no longer be sufficient to use just this. Instead, HMRC will be looking for you to have in place digital records (ie source data in your accounting systems) that are then linked through to the software you are using to compile the return. This means the VAT return is populated with numbers taken directly from your digital records, effectively creating a digital audit trail which will allow any queries from HMRC to be quickly investigated and resolved.
Break the digital chain: Copy or cut-and-paste and manual transposition are no longer permitted under digital linking whether this be from a PDF document to a spreadsheet or between spreadsheet cells. This means you cannot move or manipulate data manually and that “any further transfer, recapture or modification of that data must be done using digital links”. This has profound implications for the tax team as it means manual changes can no longer be made during the process. Instead, changes must be made either in a sandboxed environment within the MTD software or externally, outside the process, and be digitally linked back in.
Keep manual records: Only certain documents can still be kept in a non-digital format, such as invoices, relevant goods for those using the Flat Rate Scheme, the stock book in the Second Hand Margin Scheme, etc. All other VAT records that constitute the ‘electronic account’ must be kept digitally. Certain details should be recorded in the digital record including the business name, place of business, VAT registration number, VAT accounting systems, supplies made and received, reverse charge transactions and summary data. Digital records must be kept for a minimum of six years.
Manually submit data to the reporting entity: Previously, each VAT reporting entity or group could keep its records in any format they chose before consolidating and feeding the necessary information through to the reporting team. This is no longer the case for, while entities can keep their own digital records, these must be digitally linked through to the return.
What you can do
Link between spreadsheets: The business can link the cells between spreadsheets using formula or macros. However, this fails to solve the problems associated with managing spreadsheets. These include high error rates, complexity and key man dependency. Companies can often find their spreadsheets multiply over time and become highly complex. More and more formulas are created and inevitably these become corrupted or broken. If this happens with digital linking, you risk becoming non-compliant.
Carry out adjustments: While these can be performed outside of the end-to-end process by using spreadsheets to digitally link information back into the return, this increases the risk of error. Research suggests 88% of spreadsheets have errors and they are commonly highlighted by auditors as a major source of risk. However, using a dedicated compliance solution it’s possible to make adjustments without the need to step outside the process. Even complex calculations such as partial exemption or fuel scale charges can be made within the software with the results fed directly into the return.
Make amendments: Error corrections below a certain threshold can be carried over to the next VAT return or be disclosed using form VAT 652. The business can continue to report in either of these ways but if carrying over to the next period must separate out the correction in the return. HMRC is also considering providing an electronic channel to submit form 652 in the future.
Provide supplementary data: It has historically been difficult to submit supplementary data where required by HMRC in support of the VAT return. Going forward, HMRC anticipates being able to enable organisations to voluntarily submit supplementary data. This is expected to help with input tax claims and the need to provide input on any adjustments to input/output tax. However, it is undetermined as to when HMRC will add this functionality so for now you should continue to submit supplementary data in the usual way.
Current VAT processes are set to change markedly under MTD for VAT. This means we will all need to look closely at how we plan to accommodate these new demands by examining our workflows.
Questions you should be asking include how you will put in place digital links to capture digital records, whether you will support adjustments inside or outside the process and how you will make amendments. Grappling with these questions now will help you to decide on the right digital links solution for your organisation.