The next step in Making Tax Digital for VAT – Digital record keeping
Phase 2 of the Making Tax Digital for VAT requires all businesses over the £85,000 VAT turnover to maintain their bookkeeping records digitally. The change, that was originally meant to come into force in April 2020, was delayed to April 2021, and is now fast approaching.
By April this year businesses must have links between software for VAT related transactions e.g. till systems and the bookkeeping/VAT return software, or sales invoices must be created in the bookkeeping/VAT software – not manually.
Functional compatible software
Businesses will be required to keep records using ‘functional compatible software’. This is a software programme or set of software programmes that can:
- Record and preserve digital records
- Provide to HMRC information and returns from data held in those digital records by using the API platform
- Receive information from HMRC using the API platform
Digital accounting software, such as Xero, Sage or QuickBooks have all adapted to be able to provide the necessary links between HMRC.
The complete set of digital records to meet MTD requirements does not all have to be held in one place or programme. Digital records can be kept in a range of compatible digital formats, which together can form the digital records that HMRC require.
All data transferred between software and products that make up ‘functional compatible software’ must be digital. Once data has been entered into software used to keep and maintain digital records, any further transfer must be done via digital links.
A digital link is either:
- a data file that can be downloaded from one system and directly uploaded into another, without manually amending the file; or
- a software connection that allows data to be transferred directly from one system to another.
Using digital links will reduce the risk of errors from manual entry or manipulation of data. It will also give you a digital audit trail to help you respond to any VAT queries from HMRC. These are important efficiency and compliance benefits – but digital links can do so much more for your business.
It’s tempting to see more change as more hassle. On this occasion though, it’s an opportunity to turn something you ‘have’ to do into something that can give you a competitive edge.
Connecting data digitally has huge benefits for business planning, management, and forecasting.
Well thought-through digitally linked systems reduce manual data entry, manipulation and collation for reports. Spending less time pulling data together gives your more time to act on the insights provided. These can provide insights to help you make better business decisions, manage costs and improve how you operate.
Linked information is easier to analyse as you can drill down into the data to find answers quickly. Robust links reduce the need for manual data tasks that can introduce errors, so you can have confidence in the data.
Some businesses may also benefit from creating digital links with suppliers and customers. Being ‘digitally enabled’ will put you in the best possible position to achieve this, helping you to build and maintain strong business relationships.
The government has published further information on this next phase under section 4 on their website here – Digital links.
For help with MTD for VAT, please contact Jane Spraggs.