The next stage of Making Tax Digital (MTD) for VAT came into effect on 1 April 2021, from which date businesses in MTD must have a fully digital process for compiling the information needed for their VAT returns. Some businesses with particularly complex accounting processes have been able to agree an extension to the transition to fully digital records, but from 1 April 2021 all other businesses are expected to be able to compile the VAT return data digitally.

What are digital links?

Some businesses have separate accounting systems that deal with particular functions, for example the sales ledger, may be kept on a different software program from the rest of the accounting system, or a business operating in divisions, or in a VAT group, may use different accounting programs in the different divisions or group members.

In order to prepare the VAT return the data from the separate systems must be combined or consolidated.  From 1 April this combination or consolidation process must be wholly digital, this means that data must be transferred digitally from one system to another, or from the component systems into the program which is used to file the return.  There must be no manual re-keying of data or cut-and-pasting from one spreadsheet to another (although spreadsheets may be linked directly).

If adjustments are required, for example, for partial exemption, these can be calculated manually but the resulting adjustments must be entered into the accounting systems so that they become part of the digital records.

Businesses that do not fully comply with digital record-keeping requirements may be subject to a penalty and so any businesses that are still using manual processes to prepare VAT returns should discuss with their software advisers ways in which they could be made fully digital.