Making Tax Digital for VAT – end of soft-landing period

1 April 2021 marks the end of the Making Tax Digital (MTD) for VAT soft-landing period, bringing in phase 2 (that was postponed due to COVID). This will affect VAT return periods starting on or after 1 April 2021.

2019 saw Phase 1 of MTD for VAT bringing in the digital filing of VAT returns. The most important element was to ensure businesses could file the VAT returns electronically through the software package itself and a soft-landing period was given to allow time to implement digital links.

Phase 2 of MTD for VAT, which comes into effect on 1 April 2021, dictates that there now has to be digital links between all aspects of the accounting function. This means no manual keying in of data unless it is the first point of entry to the accounting system. There needs to be a clear digital link of the data from the source document all the way through to VAT submission.

You can make a formal application to HMRC for an extension to the soft-landing period, see section 4.2.1.3.

What is a digital link?

It is an electronic exchange of data between software programs, products or applications without the involvement or need for manual intervention. This can be the transfer of data within a business between two pieces of software or transfer of data to an agent in order for them to prepare and submit a VAT return.

A digital link does include linked cells within a spreadsheet e.g. a formula in one sheet that mirrors the sources value in another cell. The following are accepted digital links (this is not exhaustive):

• emailing a spreadsheet containing digital records so the information can be imported into another software product
• transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to someone else who then imports that data into their software
• XML, CSV import and export, and download and upload of files
• automated data transfer
• API transfer

Please note Cut/copy and paste is not a digital link.

Between which software is a digital link required?

A digital link is required between each program, product or software that is used as a functional compatible software. HMRC have outlined examples of where the digital link is required.

Some of these digital links were already mandatory in phase 1 but some weren’t due to the soft landing period. The digital links now mandatory from 1 April 2021 (this list is not exhaustive):

• Transferring data from an accounting system to an API enabled programme from which the VAT return will be submitted
• Transferring data from multiple spreadsheets into a designated VAT return spreadsheet (a digital link is already mandatory between the designated VAT return spreadsheet and bridging software)
• Transferring data from an accounting system into a designated VAT return spreadsheet (a digital link is already mandatory between the designated VAT return spreadsheet and bridging software)
• Group VAT returns or combining data from different parts of the same business – When transferring the data from each entity/department into a designated group VAT return spreadsheet and then between this spreadsheet and the API enabled software from which the return will be submitted

Where the digital link is not required

• Transferring data to/from a spreadsheet used to calculate adjustments (such as partial exemption or capital goods scheme) from/to the API enabled software from which the return with be submitted
• When agents make adjustments to client data ranging from correcting mistakes to adjustments required by VAT law

If you would like to find out more about Making Tax Digital, you can find our helpful resources here.

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