What are digital links? Getting your clients MTD-ready

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 Making Tax Digital, sum up what’s changed in phase 2 and focus on the crucial concept of digital links. Read on to learn more about our accounting software for Making Tax Digital. 

What is Making Tax Digital?

If you worked with businesses whose annual turnover is above the VAT threshold of £85,000, you’ll have heard of  Making Tax Digital before. 

Phase one was introduced in April 2019, and it aims to do away with paper tax returns and make all tax affairs entirely digital. 

Changes in MTD for VAT phase 2

MTD for VAT phase one included a ‘soft landing’ period. Initially set to last a year, to April 2020, but extended to April 2021 due to the COVID-19 pandemic, it aimed to give businesses time to adapt to the new requirements. 

During that period, businesses had to: 

• keep regular accounting records in digital form

• ensure digital records were in an HMRC-recognised format or use bridging software to convert them 

• send regular VAT returns to HMRC 

From April 2021 onwards, though, HMRC introduced tighter rules. Businesses must now also provide proper digital links for their data.

These MTD rules extend to cover all businesses from April 2022.

Businesses should be aware that basic bridging software isn't  enough to stay MTD-compliant and there are tough penalties for businesses that don’t comply. However, if you use QuickBooks bridging software, then there is no need to worry.

What is a digital link?

Under the new rules, 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.

In MTD phase two, 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 for the purposes of MTD for VAT.

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 MTD 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. 

We hope this article has been helpful. Understanding digital links can be complicated – not least because HMRC’s rules and regulations around them are so precise. But it’s also important, and not just because using them is now compulsory: if digital links work as intended, setting them up will help reduce errors, so your clients can avoid potential penalties for incorrect or late filings in the longer term. 

If you want to find out more about how to make sure your clients are Making Tax Digital compliant, visit the QuickBooks MTD hub for help and advice.