'Digital links' for Making Tax Digital

Digital links play a vital role in connecting software packages and submitting MTD-compliant VAT returns to HMRC.

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.

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.

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.

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.

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.”

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 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 ITSA 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. Take a look here to see how Xero has helped businesses stay compliant with MTD and supported them with running a healthier business overall.

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

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. You can find a full list of MTD exemption criteria here.

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.

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