What are digital links? Simplify VAT compliance for your clients

As an accountant, it’s crucial to stay on top of all the changes to rules and regulations that could affect your clients. 

One of the biggest recent changes has been the ongoing roll-out of Making Tax Digital (MTD). Pilot schemes for Income Tax and VAT began in 2018, and MTD for VAT phase one was rolled out in April 2019, targeting businesses with a taxable turnover above the VAT threshold. 

Now, the scheme is extending to cover all VAT registered businesses, coming into effect from April 2022. Accountants need to understand how their clients can stay compliant.

In this article, we’ll briefly introduce what the updated VAT compliance requirements are, sum up what’s changed in phase 2 and focus on the crucial concept of digital links. Read on to learn more about our cloud-based accounting software.

What is a digital link?

Under the new VAT compliance requirements, your VAT data must be submitted and kept in approved forms, using what HMRC calls ‘functional compatible software’. One way to achieve this is to do all your VAT processing through HMRC-approved systems. Some types of accounting software will offer this functionality. 

But what about when businesses store or process their data in other formats? Then you need digital links. 

In short, a digital link is a transfer of data from one program, product or application to another. The most basic examples are automated transfers, where the only human intervention involves clicking a button to initiate the process. 

We’ll go into more examples later, and it’s worth noting that HMRC has some pretty strict rules on what does or doesn’t count as a digital link. 

Still, the best way to understand it is in contrast to ‘manual links’, where data is copied from one program to another or written down by hand and manually entered into another program, product or application.

With the updated VAT compliance requirements, manual links won’t be accepted for VAT returns. Businesses must ensure all data is digitally linked for its entire journey – from initial entry to final submission to HMRC. 

Why are digital links important?

HMRC believes that having digital links at every step of the data’s journey will reduce the chance of human error and fraud and make it easier to investigate and resolve discrepancies and issues. 

Providing digital links will create a ‘digital audit trail’ making it possible for HMRC to retrace the steps of any piece of data.

Why do businesses need digital links?

They improve accuracy but are also a key part of compliance. 

To avoid any nasty surprises, accountants should make sure their clients are fully up to date as soon as possible.

Digital link examples

Here are some examples of HMRC-approved digital links. 

Digital links in spreadsheets

The first examples given on the government’s page on the topic features spreadsheets. This is reassuring, as many businesses use spreadsheet software to do their initial accounting. 

HMRC is careful to point out that simply cutting or copying and pasting values from one cell to another won’t count as a digital link.

But, spreadsheet formulas are considered digital links, so businesses can use them to fill in data automatically. 

Similarly, any use of formulas to transfer data from one sheet to another is also considered a digital link.

Physically transferring digital links

According to HMRC, the following will be accepted as digital links: 

• ‘emailing a spreadsheet containing digital records’, then importing those records

• ‘transferring a set of digital records onto a portable device’ and ‘physically giving this to someone else’ who then imports the records

Because the transfer of data to the email or memory stick and out again is solely digital, the digital audit trail is preserved: the chain of digital links isn’t broken. 

Other transfer types

HMRC lists a wide range of other types of transfer that fit the digital link requirements. These include: 

• API transfer

• automated data transfer

• XML and CSV import and export

• downloading and uploading files

Again, what’s important is that the transfer of the data occurs digitally.

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