The requirement to keep digital links if you are already caught under Making Tax Digital (MTD) rules came into force from 1st April 2021 as part of the second phase. HMRC defines a digital link as transfer of data between software programmes or applications.
Here is link to our last blog on this subject in early March https://www.myersclark.co.uk/blog-post/what-digital-record-keeping which outlines a definition of digital record keeping together with some examples. It is well worth a read if you are not familiar with the subject.
In this blog we are going to take a deeper dive and answer some common questions relating to MTD and the requirement to keep digital links.
I am submitting VAT Returns under MTD so surely, I am covered?
Those businesses that are VAT registered came under MTD in April 2019. At that point all you were required to do was to keep your records in a software that was a functional compatible software, i.e. it spoke to the HMRC portal. We were not looking at the source document at the time because there was a grace period for this part of the legislation.
The use of a cloud software and or a bridging software that had the submission facility to HMRC was sufficient because it did the job.
Roll forward to April this year, the grace period has ended and requirement to keep digital records and links is now mandatory. Basically, what this means is that there now needs to be connections between the digital records and the VAT Return. This whole process creates a digital chain.
The question you need to ask is when does your data become digital because once it becomes digital it forms part of the digital chain and cannot then be modified manually apart from a few exceptions such as calculations for partial exemptions and retail schemes. So if you are doing any manual input then there is a likelihood that you are not compliant.
How do I record my Sales?
The data generally becomes digital once it is in a software including spreadsheets (but not Ms Word).
If you are raising your sales invoice within your accounting software which submits the VAT Return than that is perfect. If, however you are not recording your sales in the accounting software in the first instance then the following scenario’s will apply:
- You are raising the sales invoice in another system in which case that place is the start of your digital journey and any further transmissions cannot be done manually and therefore you cannot key the details into your accounting software. Cut and paste functionality is also not appropriate. The most common way of moving the data is to use a CSV functionality which most software allows.
- You are raising your sales invoices either manually or using MsWord in which case your digital journey has not yet started, and you are okay to key the details into your accounting software This could be very inefficient use of your time and we would recommend you consider raising your sales invoices within your accounting software.
- You are not raising sales invoices at all for example if you are in retail. If you operate a till that has digital capabilities, then you should establish a link to your accounting software but if not then you can manually key in the sales or use a spreadsheet and then do a CSV upload remembering that use of spreadsheet is the start of your digital journey. Retailers are required to record their daily takings and not monthly or weekly summaries.
What about the purchase invoices I receive?
On the purchase side things are a lot simpler. There is not a requirement yet to scan and store your invoices and receipts digitally although we recommend this way of working. You can continue to keep your folders of manual invoices if you so wish and key in each item into your accounting software.
However, as you may know there is technology out there such as Dext which will use artificial intelligence to read your invoices, suggest the posting to your accounting system and store the invoice digitally too and if you would like to explore this just let us know. It is very affordable as well and you will soon recover the £25 per month it costs by better using your time on your business.
Can I still use bridging software?
The short answer is yes. If you are using a bridging software, you can continue to do so but the thing you need to be careful about is how you transfer the data to the bridging software.
Are you keying in the details manually in which case this will not suffice but if you are using links so your bridging software connects to another spreadsheet then that is fine.
What if my business is not VAT Registered?
If you are not VAT Registered than you are not yet required to follow the rules under MTD. If you are self-employed than the rules will affect you from April 2023 so now is a good time to start thinking about it and planning.
If you have registered voluntarily for VAT (i.e., your turnover is less than £85,000) then the rules will apply to you from April 2022.
What about landlords?
Landlords with rental income of more than £10,000 will be brought under the legislation of MTD from April 2023. This will mean keeping records and using a system to transmit data to HMRC on a quarterly basis. We are expecting most agents to issue statements which can be imported into your system using digital links. If you are not using an agent, then using a cloud software to raise invoices/ statements would be the recommendation.
Is it expensive to adopt the correct process?
Accounting software such as Xero, QuickBooks are not expensive and are easy to use. We have been using these for number of years now and are fully trained so we are able to train you as well and work with you. Typically, the high end of the software needs should cost no more then £25 – £30 per month and will deliver some time saving. Depending on your requirements slightly cheaper versions are also available.
Once you are fully trained on the system then the submissions to HMRC are done simply by a press of a button.
If you need help with adopoting digital solutions then please feel free to contact me directly at firstname.lastname@example.org