Making Tax Digital for VAT – new requirements from 1 April 2021

08 April 2021

Making Tax Digital for VAT (MTDfV) was introduced in April 2019 which required almost all UK VAT registered businesses to keep ‘digital records’ and file their VAT returns via ‘functional compatible software’. Originally it was a requirement that from April 2020 all underlying VAT return data be kept in a digital format and ‘digitally linked’ so that transactions can be traced from source data (ie purchase/sales ledger) through to VAT return completion and upload to HMRC. 

HMRC confirmed last July that they were giving businesses more time to implement digital links through their systems but this requirement now comes into effect for VAT accounting periods starting on or after 1 April 2021. 

What are digital links?

HMRC have defined these as a digital means of transferring VAT information from one software programme to another. This could include running a VAT report in your accounting system with automatic extraction to your calculation tool. HMRC have confirmed that these software processes constitute digital links. 

“Digital gaps” occur when manual intervention is required, for example copying information from VAT output files across to a VAT return spreadsheet. Practices will need to find alternative solutions to avoid such manual interventions. 

For example, a practice may record income and purchase transactions in its accounting system, transfer the totals to a spreadsheet in which it calculates the UK VAT return figures then send the information to bridging software, which submits the return to HMRC via an online portal. The new law requires these three pieces of software to be ‘digitally linked’.

What if you don't meet the requirements? 

Practices will need to review their current accounting systems to map the VAT audit trail and identify areas where digital links will be required. Penalties apply for failure to keep the required VAT records in the new way so it is important to ensure that your system meets the new requirements. 

The benefits of digital accounting

MTDfV is just one part of many Making Tax Digital requirements which will be brought in over coming years. Many of our GP practices have already transferred to digital accounting solutions with our support in readiness for these changes. Not only has this ensured they remain compliant and avoid penalties; but it is also providing the practice with better real time accounting information and systems that have greater budgeting and reporting capabilities. 

BDO can help you transition to digital accounting software to meet these requirements as well as helping you get the most out of these systems for the efficient management of your practice. 

For help and advice on MTDfV and the wider benefits to your practice of digital accounting please contact our team.