Making Tax Digital & Digital links – are you ready for phase 2?
Making Tax Digital (MTD) Phase two with digital links is fast approaching and businesses need to act now if they haven’t already done so or potentially face penalties after the change comes into effect from 1 April 2022.
Two years ago, on 1 April 2019, we were ready for the first phase of MTD which was all about filing through HMRC’s new API-enabled filing portal. This was the first element in what is a four-step approach:
- Filing
- Bookkeeping
- Digital journey
- Threat of penalties
MTD has made HMRC one of the most automated tax services in the world. It now goes beyond accepting simple data to being able to exchange data with fully automated communications.
A Guide to Digital Links for MTD
In this guide, we’ll start with an overview of key MTD Phase 2 changes, the role of digital links, why they’re important, what’s included in guidance as a digital link, what isn’t and how all this feeds into the digital journey.
Main MTD Phase 2 Changes
If there’s any part of your accounting system that is still manual or paper based, how can you comply with MTD from 1 April?
HMRC is looking to remove any manual processes out of record keeping and filing because HMRC views manual processes as open to manipulation and human error – they estimate potential losses at around £600m per annum.
So, if you don’t have a single system that is able to capture all of your data and is API-enabled directly to file with tax authorities, and if there are any breaks in the process of consolidating data and preparing it, you need to understand digital links and the requirements.
Digital Links for MTD
As the journey moves forward, if there is an interruption, say you are just not using a single accounting package that is able to collect and process data digitally, then you’ve got to think about a digital link.
Where there is a transference of data between accounting software packages during the process of filing a return, this must be done without manual intervention. There must be a digital link between programs, apps or whatever you’re using.
What’s included as a digital link?
- Linking cells in Excel or other spreadsheets
- Emailing spreadsheets in CSV or similar format which is then uploaded into software for the return preparation.
- Data on memory sticks,
- XML and XSD importer and exporter uploads and downloads
- API transfers
What is ruled out as a digital link?
What is ruled out is cut and paste within spreadsheets. This is considered a manual process that is susceptible to problems. Any manual adjustments and consolidations within a spreadsheet for grouped terms are also excluded.
The key message: no copying and pasting!
The ideal digital journey with digital links
There’s a simple digital journey that HMRC would like you to follow, which is that your accounting package contains compatible API filing within it so it is very straightforward.
Some packages were able to do this before 2019 but only around 15% of firms, according to HMRC, would use a package like this. Now, it is the preferred route. HMRC says that around 60% of accountants are now using a compatible API filing system.
So, if you’re digital journey and bookkeeping is like this already, then 1 April will not present many, if any, issues.
Complicated journeys
However, if you’re digital journey includes different consolidations, different ERPs or different registrations that are being consolidated, then things start to get more complicated and you may want to seek professional help if you’re unsure.
Again, you must impose secure digital links to eliminate manual processes. Must be API enabled, go through bridge software or straight to HMRC.
VAT Group
MTD will affect around 10% of businesses who have nominated to be part of a single VAT group. These have a single VAT number but are trading and invoicing independently.
All data must be consolidated to produce a single VAT return. So, businesses face the same problems of unconsolidated data and an interrupted digital journey. So, only use the prescribed digital links listed above. If your spreadsheet has API built in, you can file directly to HMRC or using bridging software.
More Making Tax Digital information:
Extension of Making Tax Digital (MTD) for VAT
Making Tax Digital (MTD) will apply to all VAT-registered businesses
If you have any questions on this, please contact your account manager who will be happy to help.
