MTD – announces more time for digital links…what does this mean?
On 17 October HMRC made a much-welcomed announcement that some businesses will qualify for an extension to the MTD for VAT (MTDfV) existing twelve months ‘soft-landing’ period.
In order to explain the significance of the extension, it is best to reprise some of the basics of what is required in order to achieve compliance with MTDfv.
Specifically, the need for a VAT-registered entity with annual VATable turnover greater than £85k, to keep digital VAT records and file MTD-compliant VAT returns.
Section 4 of HMRC VAT notice 700/22 ‘Making Tax Digital for VAT’ covers the requirements for digital record keeping, a fundamental of ensuring compliance with MTD.
- Almost all VAT registered businesses with annual VAT-able turnover in excess of £85K are required to comply with MTDfV rules.
- To achieve compliance, they must keep and preserve certain records and accounts digitally within functional compatible software.
- Functional compatible software can be a software program, or set of software programs, products or applications,
that must be able to:
- record and preserve digital records (see paragraph 4.3);
- provide to HMRC information and returns from data held in those digital records by using the API platform; and
- receive information from HMRC using the API platform.
With only limited exceptions, once VAT data has been digitally recorded into a business’ chosen accounting software any subsequent transfer, recapture or modification of it must be carried out using digital links.
While for many, everything required to achieve compliance can be done from within third-party software. For others, it can mean resorting to transferring data between disparate pieces of software in order to achieve compliance. With each piece of software needing to be ‘digitally linked’, to create a digital journey ending with the submission of an MTD-compliant VAT return.
Section 4.2 .1 of 700/22 describes a ‘digital link’ as, “…. a transfer or exchange of data is made, or can be made, electronically between software programs, products or applications”.
Digital links includes:
- linked cells in spreadsheets;
- 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 that data into their software;
- XML, CSV import and export, and downloads and uploads of files; and
- automated data transfers.
In the context of MTDfV, a soft-landing period is an amnesty period during which, provided a VAT registered entity required to comply with MTDfV regulations has tried its best to satisfying the digital links rules, and that for reasons such as their software providers are still working on delivering the required functionality, has found it impractical to comply, no penalty for non-compliance will be issued.
Prior to the launch of MTDfV, HMRC announced there would be one-year soft-landing period for all businesses who, after trying, were initially unable meet the legal requirement for digital links. The period-of-soft-landing was, and remains to be, an essential element of ensuring a smooth roll out of MTDfV.
Why…simply…without the soft-landing many businesses, without fully functionally compatible software at the launch of MTDfV, would have been left facing fines for failing to have digital links in place, even though, they and or their software providers were doing their best to ensure that everything required to achieve compliance would be ready as soon as possible. Which, HMRC realised was not a good position to leave those willing to be compliant in.
The initial soft-landing period
For those affected, the initial soft-landing period commenced from the first day, of the first return period, after 31 March 2019 for most mandated businesses, or after 30 September for a small number of deferred businesses. Those with the most complex of VAT affairs.
As announced on 17 October, businesses with complex or legacy IT systems, who are struggling to have digital links in place within the existing one-year soft-landing window, are now able to apply for additional time to put the required digital subject to meeting certain qualifying criteria.
Where a business qualifies, the additional time will be granted as a specific direction from HMRC.
It’s important to note that there is no blanket extension to the soft-landing period and it appears that HMRC will take a fairly strict line on who does and doesn’t qualify.
Why the extension
Many businesses use bespoke software, specifically tailored to their market sector, to manage bookings, keep records, stocks, etc. Where this is the case, it is not uncommon common for there to be a need to manually post totals from one part of a system to another on a weekly, monthly or other basis.
While such transfers will not be acceptable once the soft-landing expires, replacing them with a digital link(s) is proving, for some, to be difficult.
In much the same way, many businesses with internally developed systems are finding they may need additional time to get their, often very different, software packages to talk to each other. This is particularly proving to be the case for VAT registered entities in VAT groups.
In recent months, AAT and its fellow professional bodies have highlighted to HMRC the difficulties some businesses are facing when trying to ensure they have digital links next year.
This is a particular problem in industries that use specialist software, which can often be difficult (or even impossible) to link to accounting and VAT systems.
How generous is HMRC likely to be?
While any business can apply for an extension, they will only get one if HMRC accept that one is needed.
Section 4.2 .1.3 sets out various criteria which need to be met for digital link deadline extensions. Key amongst these is that it must be “unachievable and not reasonable” to have digital links in place in the normal one-year soft-landing period.
HMRC are very clear that an extension will only be granted in “exceptional circumstances”. The department does not accept that the potential cost of achieving compliance with the digital links requirements is sufficient grounds for applying for an extension.
Furthermore, it expects businesses to make every effort to comply with ‘digital links requirements’.
HMRC examples of what might be considered “unachievable and not reasonable”, include:
- part of an IT system is incapable of importing and exporting data to or from another part, and it isn’t possible to update or replace it in time; and
- a business is in the process of updating or replacing its IT system and the planned implementation date is not before the end of the original soft-landing period.
Even where an extension application is granted by HMRC it will not be a permanent relaxation of the requirement for robust end-to-end digital links.
- Businesses still have to consider how they will put digital links in place and will need to set out a clear explanation and timetable for when and how this will be implemented in their application to HMRC.
- The length of any extension will be decided on a case by case basis, though HMRC has indicated that they do not expect that this will ordinarily be what businesses should do.
If any business thinks they may benefit from an extension, they should first look at the detail in the VAT Notice whether they meet HMRC’s criteria. If they believe they do, then a formal application has to be made to HMRC. The VAT Notice sets out the information which this must contain, including an explanation it is “unachievable and not reasonable” to have digital links in place by the end of the normal soft-landing period, a map of current VAT systems, a timetable plan to put digital links in place and details of controls for manual transfers of data in the meantime.
Applications have to be submitted before the current soft-landing-on-digital-links expires. Given the amount of information required businesses may want to make a start on their applications sooner rather than later.