Making Tax Digital For VAT Compliance Check: Digital Links And Records

Making Tax Digital for VAT requires VAT-registered businesses to keep certain records digitally and to submit VAT returns using compatible software, with data moving between different pieces of software or spreadsheets through a digital link rather than manual re-entry. An HMRC compliance check under MTD looks beyond whether the VAT figures are correct to whether the process used to produce them meets these specific record-keeping requirements.

This is different from a standard VAT compliance check on the figures themselves, although the two can run alongside each other. HMRC may ask to see how your accounting software, spreadsheets and bridging software connect, not just the final return submitted.

The digital record requirements cover specific pieces of information for each supply, such as the time of supply, value and rate of VAT charged, along with a digital VAT account bringing together the figures that make up each box on the return. These records must be maintained digitally within functional compatible software, meaning they cannot exist only on paper or be reconstructed from paper at the point of filing.

A common finding is that a business keeps some records digitally, such as sales invoices in accounting software, but maintains other elements, such as certain adjustments or a secondary trading activity, on paper or in a way that is not properly linked into the digital chain.

A digital link is an electronic or digital transfer of data between software programs, products or applications without the need for manual intervention such as retyping figures or working them out on a calculator and entering the result by hand. Acceptable digital links include linked cells in spreadsheets, automated data transfer, and email transfer of a digital file, but do not include simply retyping a total from one document into another.

HMRC treats a broken digital link as a record-keeping failure even where the resulting VAT figure is entirely accurate, because the requirement is about the integrity of the digital audit trail, not just the final number. Bridging software specifically exists to preserve this link between records kept in spreadsheets and the return submitted to HMRC, so its correct use is often a specific focus of these checks.

Frequent issues include manually copying totals from one spreadsheet tab to another without a linked formula, retyping figures from a subsidiary system into the main VAT workings, using bridging software that requires manual entry of the final box totals rather than pulling them from the underlying data, and maintaining some VAT-relevant records outside the digital system altogether, such as manual adjustments made on paper before being keyed into the return.

Group structures and businesses with multiple VAT registrations or complex adjustments, such as partial exemption calculations, tend to have more points in the process where a manual step can creep in, making these businesses more likely to be checked closely.

Penalties for failing to meet the digital record-keeping and digital link requirements are separate from penalties for an incorrect VAT return. HMRC has at times taken a supportive approach to enforcement during the transition to these rules, focusing on helping businesses meet the requirements rather than penalising every technical breach, but this should not be assumed to continue indefinitely or to apply to every case, particularly where a business has been told about a problem and not fixed it.

Where a penalty is considered, the usual behaviour-based principles apply: a business that took reasonable care to comply, and corrects an identified gap promptly, is in a materially better position than one that ignored earlier guidance or correspondence about its digital processes.

Prepare a simple written description of your record-keeping and software chain, from the point a transaction is first recorded through to the figures submitted on the return, identifying every system, spreadsheet and manual step involved. This is usually more persuasive to HMRC than a general assurance that your software is MTD compliant, since compliance depends on how the software is actually used, not just which product is licensed.

If a genuine gap is found during this review, whether an unlinked spreadsheet or a manual step introduced by a workaround, address it directly rather than minimising it, and correct the process for future periods promptly.