MTD4VAT: What does HMRC say about recording your transactions and digital links?
Updated: Apr 10
HMRC’s VAT Notice on Making Tax Digital 700/22, sets out the digital record-keeping requirements in section 4.3.
The HMRC recordkeeping requirements for Making Tax Digital for VAT (MTD4VAT) are as follows:
For supplies made (sales):
The time of supply (the VAT tax point)
The value of the supply (the net value excluding VAT)
The rate of VAT charged
For supplies received (purchases):
The time of supply
The value of the supply including any VAT that is not claimable by the business
The amount of input VAT to be claimed
If there is more than one supply on an invoice the business can record the totals from the invoice.
The Institute of Chartered Accountants in England and Wales have made a written statement, as follow.
“The cash accounting scheme which allows businesses to account for VAT on the basis of payments made and [income] received rather than on invoices [issued/received] continues. Such businesses are, however, required to record individual supplies made and received and creating digital records from bank statements alone will not satisfy the requirements.”
It is apparent to me that many, many small businesses will be finding that MTD4VAT will increase the time they spend on their VAT recordkeeping.
On 3 May 2019, HMRC updated the MTD VAT Notice 700/22, including a new paragraph 18.104.22.168. Part of this section is reproduced below.
‘HMRC accepts there may be additional work for a business in capturing individual supplies digitally and this in itself could lead to data entry errors. Therefore, HMRC can accept the recording of totals from a supplier statement where all the supplies on the statement relate to the same VAT period and the total VAT charged at each rate is shown. If you choose to do this, you must also cross reference all supplies on the supplier statement to invoices received, but this can be done outside of your digital records’.
In other words, you do not have to record every supply [invoice] within your digital records, but you must maintain records of all supplies behind each payment or receipt. The latter can be maintained outside of your digital records. Businesses therefore may find it helpful to record all transactions in their digital records to avoid keeping the two sets of records. Alternatively, businesses must keep a separate detailed record of all invoices behind each payment recorded in their digital records. This could be by maintaining paper supplier statements and attaching batches of the paper invoices to it.
Digital links defined
From 1 April 2021, MTD digital links became mandatory. All businesses ow have until their first VAT return period starting on or after 1 April 2021 to put digital links in place between all aspects of the accounting records. Before that, a 'soft landing' was accepted where totals between software programs could be transferred manually if the accounting systems could not use 100% digital links from detailed transactions to VAT return submission.
VAT Notice 700/22 provides the following definition, which it emphasises, has the force of law:
“A digital link is an electronic or digital transfer, or 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.”
Digital links are required to provide an electronic audit trail between the underlying detailed accounting transactions and the nine VAT return boxes. This does not mean there has to be a ‘drill down’ facility directly from VAT return to each transaction.
The digital audit trail can break down between different software and programs. However, any joins between difference software programs can be made through links with bridging software e.g. spreadsheets that may hold the detailed transactions through cloud based API links and software ‘bridges’ to HMRC’s systems to maintain the digital integrity of the numbers.
VAT Notice 700/22 sets out in more detail in section 4.2.1 ‘Digital links’ what HMRC will accept as a digital link.
Data transfer or exchange within and between software programs, applications or products that make up functional compatible software must be digital where the information continues to form part of the digital records. Once data has been entered into software used to keep and maintain digital records, any further transfer, recapture or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software to create the digital journey.
Therefore, under Making Tax Digital transferring data manually within or between different parts of a set of software or applications that make up the functional compatible software is not acceptable. This includes, for example, writing down details from an invoice in one ledger, or extracting totals from one system, that are then manually entered into another program or part of the software accounting systems.
A digital link is one where a transfer or exchange of data is made without the involvement or need for manual intervention e.g. copying over of information by hand or the manual transposition of data between difference pieces of software.
HMRC also accepts that the following are digital links:
emailing a spreadsheet containing digital records so the information can be imported into another software product
transferring a set of digital records stored on a portable device e.g. a USB memory stick that is physically given to someone else who imports the data into their software systems
XML, CSV import and export, and download and upload of files
automated data transfers
Application programming interface (API) transfer.
This list is not exhaustive. Specifically, HMRC does not consider the use of ‘cut and paste’ or ‘copy and paste’ to select and move data, either within a program or between programs, to be a digital link.