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Published: July 9, 2020

Understanding HMRC’s Making Tax Digital & Digital Links

In light of HMRC’s extension of Making Tax Digital Phase II roll-out, we have outlined key aspects of making tax digital and the digital links required.
Making Tax Digital

In light of HMRC’s extension of Making Tax Digital Phase II roll-out, we have outlined key aspects of making tax digital and the digital links required so that UK businesses of all sizes understand what is needed. The bottom line is that Phase II will demand more robust technology than the bridging software that companies may be using at the moment.  

HMRC extends MTD Phase II Roll Out by one year

April 1 2020, was meant to be the date that HMRC launched phase II of making Tax Digital across the UK. However, due to COVID-19, they have made the decision to postpone the rollout by one year to April 1 2021.

This means that UK businesses will have until their first VAT return period starting on or after 1 April 2021 to put digital links in place.

In their communication, HMRC acknowledged that COVID-19 has presented UK businesses with unprecedented challenges. Therefore HMRC is allowing all MTD businesses more time to put in place digital links across all parts of their accounting process and compatible software.

What was Making Tax Digital Phase I? 

Phase I provided UK businesses with what HMRC dubbed a ‘soft landing’ into MTD and the uptake across UK-registered businesses was officially described as “good enough”. Put simply, it did not shoot the lights out and by July 2019, only 10% of UK businesses had signed on. Furthermore, it was easy to find cheap and cheerful “bridging” software to deal with MTD’s phase 1, but phase 2 will demand a more robust technology solution to ensure your business remains 100% compliant and avoids penalties.

Making Tax Digital Phase 2

Phase 2 presents some challenging factors, the main three being:

  • Stringent rules will be introduced around digital links which is the dubbed phrase for the way businesses must upload their VAT returns, i.e digitally. 
  • Very basic accounting software tools will not have the required features to provide a way to submit the financial records on purchases as well as sales meaning they may lose accreditation.
  • penalties for non-compliance will be introduced.

How to Put Digital Links in Place for MTD 

The bottom line of MTD is that VAT return data must be filed digitally. This means that your software must be capable of providing information to HMRC and receiving information from HMRC digitally. It’s important to note that VAT IT’s domestic VAT compliance software adheres to these standards so any UK businesses currently using VAT IT for local VAT compliance and filing can be ensured of absolute compliance.  

You may also want to consider using more robust bridging software that connects your ERP/accounting system to HMRC. This is because not all accounting software will have digital links in place to do this directly and compliantly. Bridging software is useful because it will perform automated compliance checks. This will ensure your VAT calculations are accurate before you file them digitally. 

How to Combine Digital Links and Spreadsheets 

You will still be able to run your business using spreadsheets. HMRC have acknowledged that it will be too difficult to expect businesses to move everything off spreadsheets. Therefore, they have made provisions for linking spreadsheets digitally. For example, Excel can still be used for calculations as long as bridging software or API-enabled spreadsheets are used for a digital submission to HMRC. 

What Happens if I Don’t use Digital Links?

Failure to meet MTD requirements will result in businesses accruing ‘points’ with HMRC (but not the good kind). A build-up of these points will result in financial penalties. Don’t panic though. There will be a grace period for phase II for those who still need to get to grips with their new software and structures.

Making Tax Digital Technology 

Both VAT IT and our sister company vatglobal have built technology to help your business ease into MTD phase II (or phase 1 if you haven’t yet) without a hitch. Vatglobal’s technology, vfile is a seamless bridging software with an API to all ERP systems and will ensure that you remain 100% compliant on your digital transformation journey. VAT IT’s vat cloud technology also adheres to all MTD compliance. 

This article is based on original content from our sister company vatglobal which can be found at the following links:

 

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