What is Making Tax Digital?

Making Tax Digital (MTD) is a major part of the UK government’s ambition to create one of the most digitally advanced tax authorities in the world.

In April 2019, Phase 1 of MTD came into effect, and businesses with a taxable turnover above the VAT registration threshold (currently £85,000) are now required to comply with MTD for VAT.

As part of the initiative, firms must maintain digital records and send regular VAT Returns to HMRC using 'functional compatible software'. This means a 'software program or set of compatible software programs which can connect to HMRC systems via an Application Programming Interface (API)'

The end of the Soft Landing

HMRC gave a period (known as the soft-landing period) during the first 2 years of MTD, to help businesses put digital links in place between all parts of their functional compatible software. Businesses were not required to have digital links in place until their first VAT Return period, starting on or after 1 April 2021.

During the soft-landing period, if a digital link was not established, HMRC accepted the use of ‘cut and paste’ or ‘copy and paste’ as being digital links.

The soft-landing period has now ended.

What is a Digital Link

A digital link is where a transfer or exchange of data is made (or can be made) electronically between software programs, products, or applications. A digital link does not need any manual intervention, such as the copying over of information by hand, or the manual relocation of data between 2 or more pieces of software. This could be a transfer or exchange of data within a business (for example, between 2 systems), or a transfer of data to a tax agent.

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.

HMRC also accepts the following as digital links:

• emailing a spreadsheet containing digital records, so the information can be imported into another software product.
• transferring a set of digital records onto a portable device (for example, a pen drive, memory stick or flash drive) and physically giving this to someone else, who then imports the data into their software.
• XML, CSV import and export, and download and upload of files.
• automated data transfer
• API transfer

This list is not exhaustive.

HMRC no longer considers the use of ‘cut and paste’ or ‘copy and paste’ to select and move information, as a digital link.

MTD for VAT Phase 2

From 1 April 2022 MTD for VAT is being extended to all VAT registered businesses with a taxable turnover below £85,000.  These businesses will need to follow MTD for VAT rules for their first VAT return starting on or after April 2022.

The second phase of MTD for VAT is more challenging as under Phase 1 it was only the submissions which required to be digital, whereas for Phase 2 HMRC requires automated digital links from the outset.  There will need to be a digital link from when the transaction is first recorded, all the way through to the submission of the VAT Return to HMRC.  Copy and pasting and any manual typing of data will not be considered a digital link for MTD purposes.

Now is the time to check that your processes are MTD compliant.

What’s next for MTD

Looking ahead, self-employed businesses and landlords with annual business or property income over £10,000 will need to follow the rules for MTD for Income Tax from their next accounting period starting on or after 6 April 2023.

MTD for Corporation Tax is expected in April 2026 and as your advisors we carefully monitor the progress so that we can deal with the new requirements as they arise.

How can we help?

Whatever the nature and size of your business, MTD will affect you over the coming months and years.

We are excited by the changes that Making Tax Digital will bring and are actively working on making the transition as seamless as possible.

HLB McGuire + Farry are proud to be Silver Partners of Xero Accounting Software and have a team of Xero Certified Advisors and Sage Experts to help you through this process.  We can help recommend the right software for your business, and provide any necessary training and support to set you on your MTD journey.

Reach out to us today to talk about how to comply with the new MTD for VAT rules, or discuss the many ways which cloud software can benefit you and your organisation.

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