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making tax digital

Making Tax Digital, what qualifies as a digital link

Making Tax Digital is proving to be the ‘next thing’ to get under the skin of small to medium sized business owners since the maelstrom around GDPR subsided earlier this year.
Businesses who turn over in excess of £85,000 have to return their VAT ‘digitally’ from April 2019.
Whilst most of us understand why HMRC is putting more stringent practices and protocols in place (to save the Exchequer an overhead of £9 million annually correcting errors) and fully support the evolution of the digital world – it is proving pretty tricky to actually get to the bottom of what exactly constitutes a ‘digital link’ to HMRC.
HMRC have stated that they are not going to be providing links to their own API platform (which is the platform the new changes will enforce those not exempt to return through) opting to provide the necessary tools for software developers to take this task on and then charge the grateful nation for their services.

HMRC will not be offering its own software products, but will provide the Application Programming Interfaces (APIs) that commercial software developers will use to develop a range of applications that will enable businesses to keep their records digitally and integrate with HMRC systems. An API is software that that links 2 or more software programmes together, allowing them to exchange data.
Source: HMRC Making Tax Digital for Business – Stakeholder Communications Pack Published July 2018

So where does that leave the average SME?

There are of course software houses such as Sage UK who have had a field day with their version 24 of Sage 50 Accounts. As one of the software partners working with HMRC, Sage 50 Accounts, version 24 onwards contains the magical ‘digital link’ to the portal to meet the VAT April 2019 changes. Thus, if you made use of the offer to purchase the last perpetual licence available for Sage 50 and are now on Version 24 (aka 2018) you are fine where you are. You do not need to move to a Sage Subscription plan if the reason for doing this is just to access a new release of Sage Accounts to meet the April 2019 changes.

Reassuringly, Microsoft has committed to making “Supported Versions” (currently 2015 and higher) of their ERP solutions compliant with MTD in time for the introduction in April 2019. Thus, if you are a user of the Dynamics family of software (recently now rebranded Dynamics 365 Business Central) – your business partner will be able to ensure you can return directly to HMRC from your application. Under the terms and conditions of your support licensing, the Cumulative Update service pack is included in your annual contract.

Here is a link to the list of HMRC ‘software partners’ as published thus far:
https://www.gov.uk/government/publications/software-suppliers-supporting-making-tax-digital-for-vat/software-suppliers-supporting-making-tax-digital-for-vat

There has been an announcement that there will be no further review on requirements for returning other tax (such as income, for example) digitally until April 2020 – but the chances are – all businesses are going to have to make sure that their ‘digitally kept records’ can transfer information without manual intervention into the HMRC portal platform via an API (which we now know is not going to be provided by HMRC). The future can not be predicted but the need to digitally communicate with HMRC using stipulated guidelines is only going increase over time.

There are many financial controllers of SME’s across the country having sleepless nights, concerned in case a trick is missed regarding software capabilities. If you have the compliant version of your software to deal with the April 2019 changes – you can do no more at this stage. No-one can pre-empt the necessary future software requirements to meet any new MTD legislation so cannot predict when software will need to be upgraded (and let’s face it – no one wants to upgrade software in the workplace for the good of their health there should be compelling reasons to do so, which will ideally include the wider benefits)

Don’t use Accounting Software or No Upgrade Path Available to Assist?

For those businesses who use accounting software that do not have suitable upgrades available or run versions that can not return directly to the HMRC portal and do not wish to upgrade – there are bridging software applications available to enable you to return your digitally held Excel data to the HMRC portal.
If you provide your VAT data to your tax accountant via Excel* – it is your tax accountant who needs the ‘digital capabilities’ (bridging software or compliant accounting software.)

*The Excel Caveat:
If a business records all sales, purchases, and expenses in a digital spreadsheet format. The VAT Return is then prepared within the spreadsheet, using formulae already written into the spreadsheet. (It’s the absence of manual intervention here that is the key).

Using Excel to Return VAT to HMRC

In Summary – you can still use Excel to upload your VAT to HMRC but the spreadsheet will have to be API enabled which for the majority of businesses will require developer assistance (Microsoft Excel REST API for Office 365 was launched in 2016) or the purchase of bridging software thus both options need to be budgeted for. (Again, it’s all about avoiding manual intervention.)

3.2 .3 .1 API-enabled spreadsheets
These are spreadsheets that incorporate relevant Making Tax Digital APIs. They can either:
combine with accounting software to submit the required VAT information digitally to HMRC, and allow information to be sent back to the business digitally from HMRC
be used to keep digital records and then directly submit the required VAT information digitally to HMRC
Source VAT Notice 700/22: Making Tax Digital July 2018

The Legal Stuff from HMRC

The following rule 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’ does not constitute a digital link.

The following rule has the force of law:
If a set of software programs, products or applications are used as functional compatible software there must be a digital link between these pieces of software.

This digital link is required where the data to be included in any of the boxes of the VAT Return has been prepared within a software program, product or application, and this data is then transferred to another program, product or application in order to submit the VAT Return data to HMRC via the APIplatform.\\\fb

For VAT periods starting on or after 1 April 2020, there must be a digital link for any transfer or exchange of data between software programs, products or applications used as functional compatible software.

Source VAT Notice 700/22: Making Tax Digital July 2018

Thought For the Day

Certainly (and the proof is in the pudding), for the requirements that have already been announced, bridging software or API-enabled spreadsheets will enable the ‘Excel Returners’ to keep returning but the digital link to magic boxes of the VAT return is the key (no cut and paste and no typing in)

There is always reassurance for any business that the software solution they use is going to support them to meet the compliance of any new directives that emerge in the future.

Whether it’s time to hitch your waggon to an accounting solution for the first time or time to review your existing ‘hitch’, decisions should be made taking at least the following key points into account:

  • A solution’s current capabilities regarding accounts and operations in line with your current needs.
  • The consideration of your business plan that illustrates the business’s vision for growth and the IT Strategy overall that will support this.
  • The commitment from your software vendor regarding Research and Development (that by its very nature will support compliance with new directives).
  • A wide network of business partners for that software vendor to ensure continuity and succession of support and optimisation.