Everything you need to know about digital links for Making Tax Digital

As a small business owner getting to grips with what’s needed to comply with Making Tax Digital (MTD) for VAT, you’d be forgiven for feeling a little overwhelmed by the number of actions and items you’ve likely never encountered before.

From bridging software to HMRC-compliant solutions, you may still be playing catch up. Now, we turn to digital links, which have been mandatory for MTD for VAT compliance since April 2021 and play a vital role in connecting software packages and submitting MTD-compliant VAT returns to HMRC.

We’ve got you covered by breaking down everything you need to know about digital links and MTD.

What are digital links?

A digital link is a data transfer or exchange within and between functional compatible software. 

In simpler terms, digital links enable software programmes to communicate with each other and HMRC. This allows your returns to be filed digitally.

The goal of MTD is to ensure taxpayers file accurate returns using digital software. With this in mind, manually copying and pasting data undoes the digital element of MTD. Any circumstance where you’re copying, pasting or typing information does not count as a digital link.

Why do you need to use digital links for MTD?

The benefits of taxpayers using digital links are straightforward: you are less likely to make mistakes when using them. This is because they remove the need to manually upload information from one piece of software to another.

For example, you can add your VAT inputs and outputs to a spreadsheet, using a cell formula to calculate the totals. 

What are examples of MTD digital links?

Here are some examples of MTD digital linking rules in practice:

• Transferring digital records onto hardware such as a memory stick, and physically giving this to someone else who imports the data into their software.
• XML, CSV import and export, downloading and uploading files.
• A data transfer that is automated, or via an API.

For more information about the use of digital links, head to the HMRC website.

What is the digital links mandate?

HMRC has shared a number of rules on digital links that have the force of law. They include the following:

• “A digital link is an electronic or digital transfer, or an exchange of data, between software programs, products or applications.”
• “The use of ‘cut and paste’ or ‘copy and paste’ does not constitute a digital link.”
• “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.”

Can businesses still use spreadsheets for MTD?

Yes, as long as you use digital links correctly. You’ll need to have formulas in place, where inputting transaction details automatically update totals in another cell or worksheet.

While it’s still possible to use spreadsheets for MTD, it may not be straightforward – inputting transactions into a spreadsheet is risky because you could still make a mistake.

In addition, spreadsheets must be API-enabled to comply with MTD. By combining API-enabled spreadsheets with accounting software, you can submit information to HMRC digitally. Or, the spreadsheet can be used for digital record keeping, and you can submit the required information to HMRC directly.

As for what information to include in your record-keeping spreadsheet, you must have records of sales and purchases and a separate VAT summary. HMRC has a complete list of the digital records you need to keep for MTD.

You should now be equipped with all the information you need about digital links for MTD, but if you’re a business owner who’d like to learn more about the government legislation, head to our MTD resource hub, featuring videos, guides and more.