HMRC gives limited MTD ‘digital links’ extension

HMRC has extended the Making Tax Digital (MTD) for VAT compliance date for businesses judged to have complex or legacy IT systems and they will be given extra time to meet the requirement to maintain digital links as part of the new filing regime

As well as keeping digital records, all VAT registered businesses with a turnover of more than £85,000 are required to have in place digital links between all parts of their functional compatible software.

HMRC has already said it is allowing a period of time, known as the ‘soft landing period’ for this to be achieved, and for the first year of mandation businesses will not be required to have digital links between software programs.

This means that if Making Tax Digital rules first apply from a VAT period starting on or after 1 April 2019, businesses have until their first VAT return period starting on or after 1 April 2020 to put digital links in place.

For VAT periods starting on or after 1 October 2019, businesses have until their first VAT return period starting on or after 1 October 2020 to put digital links in place.

During the soft landing period only, where a digital link has not been established between software programs, HMRC will accept the use of ‘cut and paste’ or ‘copy and paste’ as being a digital link for these VAT periods.

However, HMRC has now updated its guidance to say that businesses with complex or legacy IT systems may require a longer period to put digital links in place across their functional compatible software.

Businesses can apply for additional time to put the required digital links in place (subject to qualifying criteria). HMRC will also consider specific direction applications outside of the soft landing period(s) where more time is needed to comply with digital link requirements following the purchase of another business.

However, HMRC makes clear that ‘cost alone’ is not sufficient reason to issue a specific direction. Business are expected to make every effort to comply with the digital links requirements by the end of the soft landing period.

To be considered for a specific direction, and granted an extension to the soft landing period, businesses need to make a formal application to HMRC.

They should explain why it is unachievable and not reasonable to have digital links in place by the Making Tax Digital for VAT digital links mandation date. They also need to submit details of the systems that are unable to be digitally linked, for example by providing a current map of existing VAT systems, highlighting the exact areas that cannot be digitally linked.

Businesses must provide a clear explanation and timetable for when and how they will become fully Making Tax Digital compliant, which HMRC says will ordinarily be no later than one year from the end of their soft landing period.

What is deemed ‘unachievable and not reasonable’ will depend on the individual circumstances.

Examples given by HMRC include where a component part of the business’ IT system is not capable of importing and exporting data from another part of the IT system and it is not possible to update or replace that non-compliant component (or supersede that part of the system) by the end of the soft landing period. It will also apply where a business is in the process of updating or replacing its IT system and the planned implementation date for the new IT system is not before the end of the soft landing period.

The guidance includes details of how to apply for an extension and samples of system process maps.

VAT Notice 700/22: Making Tax Digital for VAT

Brearley & Co can advise you in regard to your MTD requirements. Contact us if you need advice.