The requirements of Making Tax Digital (MTD) changed from 1 April 2021. It isn’t enough to just file your VAT return using software. Now you also have to worry about where your data comes from, and how it gets into your accounting records. So just what are digital links, and how do you get them?
What are Digital Links
HMRC defines digital links as “where a transfer or exchange of data is made (or can be made) electronically between software programs, products or applications.”
The easiest way to think about digital links is when you are moving information from one system to another. If for example your business sells products online you will have a shopping cart on your website with records of all your sales. You will also have accounting records. A digital link is what you would need to electronically transfer data from your shopping cart to your accounting records.
You don’t have to have everything set up to link automatically. You can download a report from one system and import it into another one. But you need to have digital links to transfer data instead of being able to enter data manually.
Do I have to worry about digital record-keeping
The short answer is yes. If your business is registered for VAT, and your taxable turnover is above the VAT registration threshold of £85,000, then your business has to be registered for MTD for VAT. This means that you have to keep digital records and file your VAT return using software.
Don’t worry too much if you still have some very manual systems, for example if you still use a paper invoice book. If you use a paper invoice book, and enter those sales manually into your accounting records, the “digital journey” starts from when the sales are entered into your accounting records.
What records have to be kept digitally?
For every sale you need to have a digital record of:
- When the sale was made, or when payment was made if you are on cash accounting for VAT.
- What the net value was excluding VAT, and
- What rate of VAT was charged.
Some of the rules around what to do when you sell items with different VAT rates can get quite complicated.
You also need to have a digital record of your outgoings where they will make up part of the VAT you reclaim in your VAT return. The information you have to keep digitally is very similar to what is required for your sales.
What if my turnover is under the VAT registration threshold
Making Tax Digital for VAT is being extended to cover ALL VAT registered businesses, even if your turnover is under the VAT registration threshold, from April 2022. That is now well under a year away. All of our VAT clients are now registered for MTD for VAT because they all maintain their accounting records digitally already.
There are exemptions to MTD for VAT, primarily for businesses run by practising members of a religious society whose beliefs are incompatible with using electronics.
Digital links will make your life easier
Are you reading this blog and thinking it all just sounds too much like hard work? Digital links done properly will actually make your life easier. The more your financial data links up, the less time you have to spend pulling it together. You can focus your efforts on growing your business instead of battling with your business admin.
How do I get started?
Before you try to put digital links in place you need to understand your data flows. When we start working with a new client one of the key onboarding steps is to map their systems. Make sure you have a clear picture of what software you use and why, before you try to join it together.
We can help you with mapping your systems and identifying where digital links are required. Get in touch and ask about our accounting systems audit.