2021 has been a busy year for VAT. Brexit, the latest coronavirus lockdown and the introduction of the domestic reverse charge for construction services have seen unprecedented shifts in the way that VAT is collected in the UK. In any other year the introduction of the last, and most challenging, aspect of Making Tax Digital – digital links – would have attracted more attention.
However, this year the new requirements may have been overlooked as more pressing changes are taking place. This is unfortunate as this latest obligation, which must be met for the submission of the first VAT return on or after 1 April 2021, provides an opportunity for businesses to take stock of their VAT compliance process in a way that should improve the quality of the information provided to HMRC. When these changes were announced, HMRC stated that the overriding purpose of MTD was to prevent errors arising from careless mistakes. The new digital links requirement means businesses need to digitally link all applications used in the VAT return process in a compliant way, creating an audit trail back to the source data.
The introduction of digital links is the measure most likely to prevent human errors, as it should automate the transfer of VAT return data held in an organisation's digital records to the nine-box VAT return data that is submitted to HMRC. This means that the manual transposition of data (including the use of 'copy' and 'paste') is no longer possible. However, the complexity of VAT legislation means that some manual adjustments are still possible, for example organisations that are required to make adjustments in accordance with the Capital Goods Scheme rules can adjust the VAT return manually.
The introduction of the digital links requirement this year is merely the latest iteration of a wider modernisation of the tax compliance process. MTD's success, or otherwise, will always be difficult to measure with any accuracy. However, in our view a failure to embrace these changes is a missed opportunity. Organisations that take this opportunity to think deeply about how they compile their accounting information may reap the benefits of a more efficient, compliant system in the future as tax digitisation will only become more prevalent.