Digital links for Making Tax Digital

What is a digital link for Making Tax Digital?

Since April 2021, digital links have been mandatory for Making Tax Digital (MTD) for VAT.

A digital link is a data transfer or exchange within and between functional compatible software. Put simply, digital links enable software programmes to communicate with each other and HMRC, so your returns can be filed digitally.

This guide will tell you everything you need to know about how MTD digital links and HMRC-recognised software can help you stay compliant.

Why do businesses need to use digital links for MTD?

An example of a digital link is adding your VAT inputs and outputs to a spreadsheet, and using a cell formula to calculate the totals. They remove the need to manually upload information from one piece of software to another.

Taxpayers are less likely to make mistakes when they use digital links and businesses must use digital links to comply with MTD rules.

Examples of MTD digital links

The use cases below are examples of MTD digital linking rules in practice:

• Emailing a spreadsheet that contains your digital records, for use in another software product.
• Transferring digital records onto hardware such as a pen drive, flash drive, or memory stick, and physically giving this to someone else who imports the data into their software.
• XML, CSV import and export, downloading and uploading files.
• The data transfer that is automated, or via an API.

You can find more information about digital linkage use cases on the HMRC website.

What is not accepted as a digital link?

Making Tax Digital was introduced to help taxpayers file accurate returns using digital software. Manually copying and pasting data undoes the digital element of Making Tax Digital.

As such, any circumstance where you’re copying, pasting or typing information does not count as a digital link.

Digital links mandate

HMRC has pointed out a handful of rules on digital links that have the force of law. They include the following:

“A digital link is an electronic or digital transfer, or an exchange of data, between software programs, products or applications.”

“The use of ‘cut and paste’ or ‘copy and paste’ does not constitute a digital link.”

“If a set of software programs, products or applications are used as functional compatible software, there must be a digital link between these pieces of software.”

Ways of submitting MTD digital links

Can I still use spreadsheets for MTD?

Yes, as long as digital links are used correctly.

You’ll need to have formulas in place so that inputting transaction details automatically update totals in another cell or worksheet. Bear in mind that, while it’s still possible to use spreadsheets for MTD, it can be problematic. Inputting your transactions into a spreadsheet is risky because you could still make a mistake.

Spreadsheets must be API-enabled to comply with Making Tax Digital. API enabled spreadsheets combined with accounting software can submit information to HMRC digitally. Or, they can be used for digital record keeping, and submit the required information to HMRC directly.

There’s no cut-off date for using spreadsheets for Making Tax Digital. However, as further stages of the legislation roll out, it’ll be harder to use spreadsheets.

Complex formulas are required to integrate multiple spreadsheets, and these can fail. The same records you would need multiple spreadsheets for can all be captured in one piece of cloud-based accounting software.

What information should my record-keeping spreadsheet include?

Your spreadsheet should include records of sales and purchases and a separate VAT summary. HMRC has a complete list of the digital records you need to keep for MTD.

Can I still use spreadsheets for MTD?

Are spreadsheets a temporary solution for Making Tax Digital (MTD) compliance?

Spreadsheets can be a long term option for Making Tax Digital, providing you have bridging software that connects to HMRC and allows you to submit returns online. You can't copy and paste spreadsheet records across, and you need to meet HMRC digital linking requirements.

It's worth noting that using spreadsheets for MTD for IT could be more complicated, given the changes to the submissions process.

What are the requirements for using spreadsheets under MTD?

Spreadsheets must be linked to MTD-compliant bridging software. Bridging software allows businesses to meet digital linking rules by connecting spreadsheet records to HMRC and enabling online returns.

Is it better to switch to fully integrated accounting software?

Bridging software can be a great stop-gap solution for businesses that want to continue using familiar processes.

But, MTD-compliant cloud software doesn't just help you meet compliance requirements. It can help you save time on admin, simplify your processes, and improve the accuracy of your records and submissions. Modern software also gives you a complete view of your finances, so you can get a true reading of your cash flow and make smarter financial decisions based on live data.

MTD-compliant cloud software automates processes such as reconciliation and reporting, so you can spend less time on admin. With accounting software like Xero, records flow into draft returns automatically, making the MTD filing process fast and simple.

What happens if my spreadsheet setup doesn’t meet MTD requirements?

You need bridging software to use spreadsheets compliantly. If you fail to use functional compatible software, you could be fined £400 for every return. If records aren't kept digitally, you could be fined between £5 and £15 for every day you don't comply.

MTD-compliant software like Xero is HMRC-recognised and meets digital linking requirements. Getting software like Xero in place can make compliance easier, and simplify your day-to-day admin too.

Will MTD rules apply to Income Tax as well?

Yes. From April 2026, sole traders and landlords earning above £50,000 will need to use the MTD for IT system. Those earning above £30,000 will join MTD for IT in April 2027. And, the legislation has been extended to sole traders and landlords earning above £20,000, who'll need to keep digital records and submit returns online from April 2028.

Getting a system in place for keeping digital records and submitting returns for VAT and Income Tax now will give you plenty of time to familiarise yourself with the rules. Xero accounting software can help you keep digital records and submit MTD compliant returns for VAT and Income Tax. If you want to learn more about how MTD for IT affects businesses like yours, head to our MTD for IT resource hub.

Can you still use bridging software for MTD?

Yes. Bridging software was introduced as a temporary solution back in 2019, but HMRC has decided to keep it in place.

There’s no cut off date for using bridging software. But submitting your returns will become more complicated if you need to use multiple spreadsheets when MTD for IT comes into effect.

Making Tax Digital software

Cloud-based accounting software is the most effective way to keep records and maintain digital links. You can house all of your transactions and reports in one system, so you don’t need to worry about connecting multiple software programmes.

Providing you keep your account up to date, you can create an MTD-compliant return at the click of a button with Xero.

If it’s your first time using Making Tax Digital software, it might take some getting used to. But once you’re there, you may find it easier and quicker to manage your tax and submit returns.

What to do if your digital links are wrong

If your digital links are wrong, you should correct them immediately. Contact HMRC if you’ve filed your return with an error.

Can I get a digital link exemption for MTD for VAT?

No. Digital links are a fundamental feature of the legislation, so you can’t be made exempt from them.

Some businesses could be eligible for exemption from MTD overall. HMRC has a full list of MTD exemption criteria.

Learn more about Making Tax Digital

You can learn more about Making Tax Digital for businesses by exploring our MTD resource hub, featuring videos, guides and webinars from the experts.

If you’re an accountant or bookkeeper, learn more about how to prepare your business and clients for MTD by exploring our MTD resources and FAQs.