BRIEF GUIDE TO DIGITAL RECORD KEEPING REQUIREMENTS
How will Making Tax Digital affect primary business records?
Invoices, receipts and other documents. Making Tax Digital for VAT (MTDfV) won’t affect how you produce, receive or store these types of document. You can continue to issue and receive paper documents. It’s how you store and process the information shown on these documents that MTDfV affects. Specifically, they must be stored digitally. There are apps that will allow you to use mobile devices to make and keep a photographic record of receipts etc.
Under existing rules, which are changed by MTDfV, you can if you wish convert paper documents by taking an image (scanning) and storing them electronically. However, the details of those invoices etc. will still need to be added to your bookkeeping software, typically by typing in the details. Where you keep a digital copy of a document there is no requirement to retain the original. However, some types of physical document must be retained, such as proof of export documents.
Tip. If you’re already using commercial software to keep your records the chances are this will meet the requirement for recording data from invoices etc.
Here are examples of record keeping under MTDfV taken from HMRC’s guidance:
Example 1
A business receives an invoice and types selected data contained in the invoice into functional compatible software. They must keep the invoice in its original form as the data in the functional compatible software is not a copy of the invoice.
Example 2
A business has functional compatible software that scans the invoices received and puts the information in its ledger. If the image is retained and contains all the detail required for VAT purposes, then the business does not need to keep the original invoice unless it is required for another purpose.
If you deregister from VAT you will no longer need to keep digital records in functional compatible software, but you must retain your VAT records for the required period.
What are digital links and why do I need to know about them?
The term “digital links” comes direct from the VAT legislation for MTDfV and is likely to be repeated in Making Tax Digital for Business rules when the time comes. There’s no plain English explanation in the legislation of what is meant by “digital links”, but HMRC has provided extensive guidance which is explained in the following paragraphs.
HMRC describes the need for digital links like this:
Data transfer or exchange within and between software programs, applications or products that make up functional compatible software must be digital where the information continues to form part of the digital records. Once data has been entered into software used to keep and maintain digital records, any further transfer, recapture or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software to create the digital journey.
It goes on to say that manual links aren’t acceptable for MTDfV and gives this example. “Noting down details from an invoice in one ledger and then using that handwritten information to manually update another part of the business functional compatible software system”.
What digital links will be required if my business has separate branches or divisions?
There are no plans to make exceptions for businesses which operate through separate branches or divisions but submit their combined figures on a single VAT return. This means that by April 2021 they will need to have digital links for data between each branch and the department/division which is responsible for collating and submitting the MTDfV reports.
What does and doesn’t count as a digital link?
A digital link is the means by which data in one program or app is transferred or copies to another without “manual intervention” such as “copying of information by hand or the manual transposition of data between two or more pieces of software”, e.g. you or your bookkeeper using a copy and paste routine from one spreadsheet to another.
The following are examples of acceptable digital links:
- a formula in one sheet which obtains the value for that cell from another spreadsheet or area of the same spreadsheet
- an app that automatically draws data from another app, spreadsheet or digital record
Where data needs to be transferred between two or more different people who need to work on it, digital links must be used. For example:
- emailing a spreadsheet containing digital records to your accountant or bookkeeper so they can import the data into their software
- transferring a set of digital records onto a portable device (for example, a pen drive, memory stick, flash drive) and physically giving this to your accountant or bookkeeper to import that data into their software
- using an XML, CSV file to import, export, download or upload files
- using “automated data transfer”
- transferring data using an application programming interface
Tip. The list above is based on HMRC’s guidance. However, the list is not exhaustive. Essentially any means of transferring digital data inside or outside your organisation which doesn’t involve manual intervention to select individual items of data will meet HMRC’s definition of a digital link. So, using cut and paste to select and move information, either within a software program or between software programs, is not a digital link. However, there is an exception to this rule which is explained in the next paragraph
Will digital links be required as soon as MTDfV takes effect?
HMRC says that it will allow a “soft landing” for the requirement to use digital links. In practice this means that for the first year of MTDfV, i.e. from April 2019 to 31 March 2021, you won’t be required to have digital links where you’re moving data around.
Example. Your bookkeeping software contains all the data needed for the VAT return. However, you need to transfer it to another app, bridging software, to transfer the data to HMRC for your MTDfV report. You enter the data using a cut and paste from your bookkeeping software.
Unless there are very good reasons not to our advice is to forget about the “soft landing” and aim to have digital links for all your data as soon as possible.
HMRC’s ability to check whether businesses are using digital links correctly is questionable. However, it will be to your advantage make sure you do use them as apart from being a legal requirement for MTDfV it will make your (and your bookkeepers) easier if you don’t have to manually copy data from one place to another.
Are manual calculations allowed at all?
Yes, despite HMRC’s goal of having the whole VAT return process automated from start to finish there are instances where it’s just not possible.
HMRC uses the example of a capital goods scheme adjustment. A more common instance where a manual calculation is permitted is partial exemption adjustment. Broadly any figure where you have to make a calculation outside of your bookkeeping software and enter the result manually, is allowed. HMRC will still expect the calculation to be made digitally, for example, by using a spreadsheet, from which you then type or cut and paste the result into your bookkeeping software.
What if I make supplies through an agent?
You might supply customers indirectly. For example, you provide goods to a trader so they can sell them with their own products or services, say because he thinks he will improve his sales if he can supply your goods alongside. However, he takes no profit from the transaction, but merely acts as your selling agent. In this situation you do not have to keep digital records for the sales until you receive details the agent. If you receive a summary document from the agent you can treat it as if it were a single invoice issued by you and keep a digital record of it accordingly.
How should I record VAT adjustments in my digital records?
There are situations where you might need to adjust the amount of VAT relating to sales or purchases you’ve entered into your bookkeeping software. Partial exemption adjustments for example.
Although the way adjustments can be made will vary depending on the bookkeeping software, it’s likely that you’ll need to work out the adjustment manually. You must keep the calculation of the adjustment with your VAT records as it forms part of your “VAT account” (a summary of the ins and outs of your VAT reports), but only the result needs to be added to the data for submission of your MTDfV report. In other words there’s no requirement to show how the adjustment is arrived at, only what it is. There’s also no requirement to digitally link the adjustment calculation to the entry.
MTDfV compatible software must allow adjustments to closed VAT periods. Therefore, the bookkeeper can use this facility to add the VAT on the overlooked invoices.
Note. Whatever means and method the software allows this type of adjustment, MTDfV requires that full details of the invoices must be recorded in the software.
What if I make a mistake in my bookkeeping?
The rules for correcting errors in a return which has been submitted are the same under MTDfV as they are now. There are two ways you can do it depending on the amount of the error:
- where the total of VAT under or overstated in a previous return is no more than £10,000, the transactions omitted or incorrectly recorded can be corrected in a subsequent VAT by an adjustment, or where appropriate recording the omitted transactions; or
- where the total under or overstated VAT exceeds £10,000 you must report details of the error to HMRC in a letter or using form 652 and paying any VAT owed or reclaiming a repayment. Important note. A correction made using this method is outside your digital VAT records and so the transactions involved must not be included in the data you subsequently report under MTDfV.
Leave A Comment