Making Tax Digital for VAT is now well and truly in effect, with businesses within the regime required to maintain digital records and submit their VAT returns online through compatible software.
However, one area of Making Tax Digital for VAT that has yet to come into full force is that of digital links.
What is a digital link?
Under Making Tax Digital for VAT, a digital link is defined as one where data can be transferred or exchanged electronically between software programmes, products, or applications without manual intervention. Examples of digital links include (but aren’t limited to) linked cells in spreadsheets and automated data transfers.
Crucially, ‘cutting and pasting’ or ‘copy and pasting’ information is not considered to amount to a digital link.
Currently, HMRC has a soft-landing period in place for digital links. This means that businesses are not required to have digital links in place between software programmes until April 2020 (i.e. one year following the launch of Making Tax Digital for VAT).
This soft-landing period extends to October 2020 for businesses that have a deferred start date.
Extensions available under certain circumstances
In October 2019, HMRC announced that certain businesses can apply to extend the soft-landing period past April or October 2020 (as applicable).
Subject to meeting relevant criteria, the following may be considered grounds for extension:
Having a business with a complex or legacy IT system;
When a business acquires another business.
Criteria to apply for an extension
In VAT Notice 700/22 HMRC highlights that businesses, in order to be considered for an extension, should:
Make a formal application to HMRC by no later than the end of the business’ soft-landing period;
Explain ‘why it is unachievable and not reasonable for you to have digital links in place by the MTD VAT digital links mandation date’
Submit details of the systems that can’t be digitally linked;
Provide a ‘clear explanation and timetable’ for when and how the business will become fully compliant with Making Tax Digital
Highlight which controls will be ‘put in place to ensure any manually transferred data is moved accurately and without error’.
It’s also worth noting that HMRC does not consider the issue of cost alone to be grounds for applying for an extension, and ordinarily does not expect businesses to take longer than one year from the end of their soft-landing period to introduce digital links.
What is ‘unachievable and not reasonable’?
HMRC doesn’t provide a definitive answer as to what is considered unachievable and not reasonable, commenting that it will depend on individual circumstances.
A few examples are provided in VAT Notice 700/22, including one where a business is in the process of replacing its IT system and the expected implementation date for the new system isn’t until after the soft-landing period has ended.
Which businesses are likely to qualify for an extension?
Ultimately, HMRC only intends to grant an extension in exceptional circumstances, so blanket extensions shouldn’t be expected.
Nevertheless, if you think that a client may qualify for an extension (for example, based on a recent acquisition) then there is certainly merit in considering submitting an application.
Further details, including where to submit an application for extension, can be found within VAT Notice 700/22.