Making Tax Digital - all about digital links
Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. HMRC estimate there's over £9 billion a year lost to HMRC because of "avoidable mistakes", and Making Tax Digital (MTD) aims to capture some or most of that money.
VAT-registered businesses with a taxable turnover above the VAT threshold are required to use the Making Tax Digital service to keep records digitally and use software to submit their VAT returns from 1 April 2019, using digital links.
What is a digital link, and why does it matter?
Simply put, while the term ‘digital records’ refers to the actual information a business must store, such as their VAT registration number or details of invoices, the term ‘digital link’ refers to the ways in which this data is later transferred or altered.
HMRC says: “Once data has been entered into software used to keep and maintain digital records, any further transfer, recapture or modification of that data must be done using digital links.
“Each piece of software must be digitally linked to other pieces of software to create the digital journey. It follows that transferring data manually within or between different parts of a set of software programs, products or applications that make up functional compatible software is not acceptable under Making Tax Digital.”
In short, this means that businesses cannot ‘cut and paste’ information from one software program to another, or note down invoice details by hand and use this to manually update different parts of the system, as neither of these actions would create a ‘digital link’.
HMRC advises: “A digital link includes linked cells in spreadsheets, for example, if you have a formula in one sheet that mirrors the source’s value in another cell, then the cells are linked.”
It adds that the transferring of such spreadsheets via email, memory stick or flash drive in such a way which enables an agent to ‘import’ the data into their own software will also constitute a digital link.
According to HMRC: “A ‘digital link’ is one where a transfer or exchange of data is made, or can be made, electronically between software programs, products or applications. That is without the involvement or need for manual intervention such as the copying over of information by hand or the manual transposition of data between 2 or more pieces of software.”
What counts as a ‘digital link’?
According to HMRC, it can NOT be:
- ‘Cut and paste’ to select and move information, either within a software program or between software programs.
It can include:
- linked cells in spreadsheets, for example, if you have a formula in one sheet that mirrors the source’s value in another cell, then the cells are linked.
- 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
- API transfer
HMRC stress that the list is “not exhaustive”.
What else do I need to know?