Legislation requires you to have “digital links” in Making Tax Digital for VAT between your financial data and the quarterly VAT reports.
What are digital links in Making Tax Digital for VAT, and what changes might you need to make to your record keeping to achieve this?
VAT law offers no explanation of what it means by “digital links”, nevertheless all VAT-registered businesses will be required to use them in their bookkeeping processes.
HMRC says digital links in Making Tax Digital for VAT (MTDfV) are “connections that allow details to automatically be transferred from the point a transaction is made until it is included as part of your quarterly report”.
HMRC hopes digital links will make VAT reports more accurate and less open to accidental or deliberate errors.
Manual links aren’t acceptable under MTDfV, for example, “Noting down details from an invoice in one ledger and using that handwritten information to manually update” your software is a not allowed.
However, this doesn’t mean you need to create invoices, delivery notes or other primary business records electronically. Paper documents are acceptable, despite what current TV ads for bookkeeping software imply.
It’s what you do with the data on them which matters, i.e. how the information gets from invoice to your VAT return.
Sticking with the example of an invoice, it’s OK to enter the data manually into a bookkeeping app or a spreadsheet e.g. Excel, but from there the data must flow automatically to your quarterly VAT return.
If you use a bookkeeping app which HMRC has approved for MTDfV, you can be certain that the data will digitally link when you press the button to produce and send your VAT return.
If you use spreadsheets instead of an HMRC approved bookkeeping app, the data must still link digitally. For example, a cell which shows the total of other cells, or another app, by using a formula is OK, but manually cutting and pasting from one or more cells to another isn’t.
Whether you use an app or spreadsheets, you’re allowed to make manual adjustments to your data if necessary. For example, if your business is partially exempt you’re allowed to manually work out the fraction of VAT you can reclaim.
For the first twelve months that MTDfV applied to you, at least, HMRC won’t enforce digital linking. This means you can wholly or partly use manual bookkeeping.
However, as your VAT return data must be submitted electronically at some stage in your record keeping, you’ll need to use digital links.
It’s probably a good idea therefore to ignore the soft landing period and get to grips with digital links for all your data as soon as possible to avoid last minute changes when the soft landing ends.