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MTD Stage 2 – Digital Links

Sarah Baron - Menzies Accountant

Sarah Barron, VAT Senior Manager

Most, though not all, businesses are now successfully filing returns using an MTD compliant link to HMRC using its API platform.

The second stage of the process is to ensure that the records behind the returns are fully compliant. This requires that data transfer or exchange within and between the software programs or applications that produce the VAT return must be digital without any manual intervention.

What are digital links?

Once data has been entered into the software, any further processing, transfer or modification must be done using digital links. Manual transfers of data are not acceptable under MTD. Some businesses, such as those which are partially exempt are required to make calculations outside of the accounting records, which result in an adjustment to the return. It is acceptable to download data to a spreadsheet, in which it is subjected to a calculation and then enter the resulting journal into the API software. Calculations set up in the spreadsheet must have data populated by way of digital links and utilise formulae and linked cells so that data flows through the calculations without manual adjustment.

It is time to be compliant

The first year of MTD was given as a ‘soft landing’ period. So businesses which were within the first tranche of those required to file by MTD compliant software, from1 April 2019, will be required to be compliant from 1 April 2020.

At present, penalties for failure to maintain MTD compliant records would be assessed under the normal duty to keep records requirements. These can result in a daily rate penalty of up to £15 per day, capped at 100 days. Having introduced MTD and given a soft landing period, it is anticipated that the penalty regime for failure to comply will be strengthened.

How successful was the change to digital filing?

In respect of filing returns, many moved to the new API filing platform without difficulty. As ever the problems have arisen for those which fall outside of the norm. Overseas businesses have experienced problems signing up to the platform and appointing agents, particularly if they use a UK postal address for convenience and many UK businesses which were expecting payment to be taken by Direct Debit had to send manual payments. Anecdotal evidence suggests that there is a lack of robustness in the system, with account details unexpectedly changing and the service being periodically unavailable.

How to apply for additional time?

HMRC have recognised that some businesses may require more time to ensure that they are compliant, this will apply particularly to those with complex or legacy IT systems or where a new business is acquired and records must be integrated. These businesses may apply for additional time to complete their updates, however they must be able to demonstrate that they have taken reasonable steps to start the process, and any delay is purely to enable them to complete the change over. A formal application to HMRC should be made, setting out why extra time is needed and what the timetable for completion is.

Don’t fall foul of future record keeping requirements

Whilst this stage of the MTD changes will not have the same imperative of being unable to file one’s return, as was the case with the first stage, it should be anticipated that any future check on VAT records will focus on the quality of those records and their compliance with the requirement for digital links. Businesses should continue to review their systems to ensure that they are compliant and will not fall foul of record keeping requirements.

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