VAT digital links – are you ready for the April deadline?
By Susan Cattell, Head of Tax Technical Policy
27 January 2021
Susan Cattell highlights the Making Tax Digital for VAT deadline for implementing digital links between systems – and the process for applying for an extension for those who will be unable to meet it.
Making Tax Digital for VAT
Digital links
A significant aspect of MTD which was not fully effective from April (or October) 2019 was the requirement to have in place digital links between all the software programs, applications and products which make up the functional compatible software for a business. It was always the intention that ultimately all data transfer or exchange between systems must be digital. Once any data had been entered into software used to keep digital records, any further transfer, recapture or modification of that data would have to be done using digital links – and each piece of software would need to link digitally to other pieces of software. Manual transfers of data would not be acceptable.
However, it was recognised that some businesses would need time to implement digital links in full, so there has been a soft landing period. This was originally due to end by 1 April or 1 October 2020 but was extended due to COVID-19. Businesses are therefore not required to have digital links between software programs until their first VAT return period starting on or after 1 April 2021.
Section 4 of the VAT notice gives guidance on what is (or is not) a digital link and provides some examples. It is important for businesses to be aware that during the soft landing period only, where a digital link has not been established between software programs, HMRC will accept the use of ‘cut and paste’ or ‘copy and paste’ as being a digital link for these VAT periods. After the April 2021 deadline this will no longer be acceptable – the VAT notice includes a rule with the force of law that states that the use of ‘cut and paste’ or ‘copy and paste’ does not constitute a digital link except during the soft landing period.
Can the April 2021 deadline be extended?
The VAT notice notes that businesses with complex or legacy IT systems may require a longer period to put digital links in place across their functional compatible software. It is possible for these businesses to apply for additional time to put the necessary digital links in place. Formal applications for a specific direction need to be made as soon as possible and in any case before the end of the soft landing period. Businesses which do not have full digital links in place should therefore be actively considering making an application.
The application process is set out in paragraph 4.2.1.3 of the VAT notice. Businesses will need to request an application form by emailing mtdspecificdirections@hmrc.gov.uk with their business name and VAT Registration number - businesses with a Customer Compliance Manager should request a form directly from their CCM.
Detailed information must be supplied in support of the application. The VAT notice makes clear that cost alone is not a sufficient reason to issue a specific direction and that businesses are expected to make every effort to comply with the digital links requirements by the end of the soft landing period.
Information required to support an application to extend the deadline
Businesses will need to:
- explain why it is unachievable and not reasonable for them to have digital links in place by the end of the soft landing period, for example, why does commercially available software not meet the digital link requirement for their business?
- submit details of the systems that are unable to be digitally linked (provide a current map of their existing VAT systems, highlighting the exact areas that cannot be digitally linked)
- provide a clear explanation and timetable for when and how they will become fully MTD compliant (ordinarily no later than one year from the end of the soft landing period, although ICAS understands that the length of the extension will be tailored to reflect the circumstances of the business and could be longer)
- state the controls they will put in place to ensure any manually transferred data is moved accurately and without error.
What is ‘unachievable and not reasonable’ will not be the same for all businesses but will depend on individual circumstances. The VAT notice supplies a couple of examples of what might be regarded as unachievable and not reasonable:
- A component part of the business IT system is not capable of importing and exporting data from another part of the IT system and it is not possible to update or replace that non-compliant component (or supersede that part of the system) by the end of the soft landing period.
- A business is in the process of updating or replacing its IT system and the planned implementation date for the new IT system is not before the end of the soft landing period.
It is made clear that this is not an exhaustive list. As noted earlier, cost alone will not be accepted as a sufficient reason for an extension.
What happens after an extension is requested?
It is important that businesses continue working to implement digital links whilst waiting for a response from HMRC. The completed application will be formally reviewed by an allocated HMRC officer and, where relevant, discussed with the CCM. Further information or evidence may be requested.
Where HMRC decides that it will not be appropriate to issue a specific direction, ie the application is rejected, the business will be given reasons for the decision.
ICAS would like your feedback
ICAS would like to hear about members’ experiences of applying for an extension to the deadline. Please send us your feedback by emailing tax@icas.com.