HMRC has announced it will consider requests from businesses who wish to extend the Making Tax Digital (MTD) digital links deadline that comes into force in 2020. Read on to find out more about digital links, whether your business fits the criteria for an extension, and if so, the steps you need to take to apply now.

What is MTD?

MTD compliance became mandatory for most VAT registered businesses from 1 April 2019 for VAT return reporting. Some businesses enjoyed a six month reprieve until 1 October 2019. For the first year HMRC implemented a “soft landing period”, meaning the MTD requirements did not need to be operational for the first year of MTD compliance - in particular the digital links requirements.

What are digital links?

HMRC defines a digital link as “an electronic or digital transfer, or exchange of data, between software programs, products or applications”. In other words, the software you use for your VAT accounting purposes must link to one another without manual intervention. This includes “copy and paste” or indeed any other form of manual action, such as relying on written notes with details on a transaction contained in one part of the system and using the notes for another system.

A digital link is essentially the exchange or transfer of information from one application to another on a digital basis. Once data enters the process, all of the movements it makes must be digital. This involves a digital journey from start to end, e.g. sales invoice produced through to net sale and output tax captured on the VAT return.

As such, the programs you use must make up functional compatible software, otherwise HMRC has the power to challenge your VAT accounting position. It should be noted that HMRC’s guidance is underpinned by legislation, which creates an obligation on the Tax Authority to raise enquiries on MTD compliance.

In practice, all businesses will have some work to do to ensure they are MTD compliant. The MTD digital links position will probably be more challenging in practice for businesses that have complex VAT profiles.

It’s worth pointing out that a full systems overhaul is not necessarily required. For example, HMRC confirmed that linked cells in spreadsheets are a digital link, and that emailing a spreadsheet containing digital records to be imported into another software product is a digital link. Also, HMRC will condone limited manual input in some cases, such as where Capital Goods Scheme calculations are undertaken.

What do I need to do?

Many businesses have already taken steps to establish whether they satisfy the MTD digital links criteria, and/or have taken steps to get ready, while others have yet to take action. If you’ve yet to review your systems, you should clarify what you need to do and get started on updating your systems as soon as possible.

From 1 April 2020 (or 1 October 2020 for deferred businesses) the “soft landing period” will disappear, and non-compliance with MTD requirements, such as digital links obligations, could result in an HMRC challenge. Your systems must utilise digital links for any transfer or exchange of data between software programs, products and applications that are used as functional compatible software.

The only exception is businesses that obtain HMRC’s blessing for additional time to satisfy the digital links criteria.

Who can get a digital links extension?

HMRC has acknowledged concerns that have been raised about businesses that have complex or legacy IT systems that will require more time to implement digital links across their functional compatible software.

Such businesses can apply for additional time to be granted to put the required digital links in place. Formally HMRC are calling this a “specific direction”.

There are criteria that must be satisfied, and if your business qualifies HMRC will authorise additional time to implement the changes. In summary this is:

• Making a formal application as soon as possible, but before the end of the “soft landing period” – i.e. before 1 April 2020 or 1 October 2020.
• Describe why it is unachievable and unreasonable for you to have digital links in place by April or October.
• Provide details of your systems that are unable to be digitally linked, including a map of your systems flagging where there are digital link issues.
• Explain how and when you will become fully MTD compliant – HMRC would expect this to be within a year of the “soft landing period” ending, i.e. April 2021 or October 2021.
• Advise the controls that will be put in place to ensure any manually transferred data is moved accurately without error.

If you satisfy the above criteria you should consider sending an e-mail to HMRC to request an application form for an extension.

How we can help – get in touch

Further information on MTD requirements, including the criteria to obtain a digital links extension, can be found in HMRC Notice 700/22. We recommend you ensure you are familiar with the criteria and confident you can comply from the end of your “soft landing period”. We would also suggest you get in touch with your usual Johnston Carmichael VAT adviser to discuss your position and how to proceed. We’re here to help. Alternatively, contact me: Tony.Cochrane@jcca.co.uk for an initial informal chat.