With less than 50 days to go until Making Tax Digital for VAT becomes mandatory for businesses registered for VAT, HMRC has confirmed that companies will be able use a 'cut and paste' approach during the one-year soft landing before companies need to use digital links
For the first year of mandation businesses will not be required to have digital links between software programs.
During the soft landing period only, where a digital link has not been established between software programs, HMRC will accept the use of cut and paste as being a digital link for these VAT periods.
The one-year soft landing period will be in place until at least April 2020, depending on the classification of the business, giving organisations time to implement a system of digital links between all parts of their functional compatible software, for example where a company has a number of subsidiary companies with separate finance functions and departments.
A digital link includes linked cells in spreadsheets, for example, if there is a formula in one sheet that mirrors the source’s value in another cell, then the cells are linked.
The meaning of a digital link has force of law, defined as a ‘digital link is an electronic or digital transfer, or exchange of data, between software programs, products or applications’.
HMRC will also accept digital links as:
- emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation (for instance, a Partial Exemption calculation);
- transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to an agent to import that data into their software;
- XML, CSV import and export, and download and upload of files;
- automated data transfer; and
- API transfer.
However, HMRC will not allow the use of ‘cut and paste’ as this does not constitute a digital link, except for during the soft landing period as set out in HMRC guidance, paragraph 3 of the next ‘force of law’.
In terms of timing and compliance with digital link rules, compulsory reporting will first apply to the company from either the:
- VAT period starting on or after 1 April 2019, so the company will have until their first VAT return period starting on or after 1 April 2020 to put digital links in place; or
- VAT period starting on or after 1 October 2019, the company will have until their first VAT return period starting on or after 1 October 2020 to put digital links in place.
Regardless of how the VAT data is transmitted to HMRC, companies will be able to use bridging software as long as the final records are submitted in the correct digital link format.
An HMRC spokesperson told Accountancy Daily: ‘Bridging software takes information from other applications, for example, a spreadsheet or an in-house record keeping system, and lets the user send the required information digitally to HMRC in the correct format.
‘The soft landing until April 2020 relates to digital links between systems that make up the VAT return.
‘Mandated businesses still have to file via functional compatible software from April using an API (including API [application programme interface] enabled spreadsheets). However, if a business, say, has two offices using different software, they can transfer that data manually between them and HMRC in the first year – it does not have to be seamless while they transfer to the new system.’
The latest HMRC guidance on compatible record keeping states: ‘Functional compatible software is a software program, or set of software programs, products or applications, that must be able to:
- record and preserve digital records;
- provide to HMRC information and returns from data held in those digital records by using the API platform; and
- receive information from HMRC via the API platform.
HMRC expects that there will be software products available that will perform all of these functions. Some software programs will not be able to perform all of these functions by themselves.
For example, a spreadsheet or other software product that is capable of recording and preserving digital records may not be able to perform the other two functions listed above, but can still be a component of functional compatible software if it is used in conjunction with one or more programs that do perform those functions.
HMRC has also confirmed that ‘the complete set of digital records to meet Making Tax Digital requirements does not all have to be held in one place or in one program. Digital records can be kept in a range of compatible digital formats. Taken together, these form the digital records for the VAT registered entity’.
The legislation for Making Tax Digital for VAT was passed via statutory instrument under the provisions of The Value Added Tax (Amendment) Regulations 2018 (SI 2018 No. 261), which amend the VAT Regulations 1995.
HMRC VAT Notice 700/22: Making Tax Digital for VAT, updated 18 January 2019
Report by Sara White
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