Making Tax Digital – the final requirement of digital links

04 December 2020

Most housing associations are successfully submitting their VAT returns under the Making Tax Digital regime. Arguably, however, the real challenge will come when the ‘digital link’ soft landing period ends in April 2021. Our tax advisors RSM explain this in more detail.

As a direct consequence of coronavirus, HM Revenue & Customs eased the VAT compliance burden by pushing back to April 2021 the ‘digital link’ soft landing period under Making Tax Digital, giving all organisations more time to ensure that the ‘digital links’ requirement is met.

If you haven’t already done so, housing associations should start to review the ‘digital links’ journey now, and should not leave it until the last minute, as it may then be too late to implement any required IT changes. HM Revenue & Customs is unlikely to accept any reasons for not meeting a deadline that was originally April/October 2019, with an initial 12-month soft-landing period to help businesses adapt.

Essentially, the digital links requirement is looking to create a digital audit trail from the initial digital recording of a sale or purchase transaction, tracking the net and VAT values through the entire VAT return process, culminating in the nine-box VAT return numbers that are digitally submitted.

For more straightforward businesses, this may already be taken care of by their existing accounting packages. However, for housing associations, ensuring digital links between data in large Excel spreadsheets as part of an efficient VAT return process can be challenging, giving rise to the prospect of penalties following the expiry of the soft-landing period.

Housing associations will undoubtedly have some or all of the following indicators, thus making the digital links journey more complicated:

  • Large numbers of worksheets in a spreadsheet.
  • Multiple spreadsheets as part of the VAT return process.
  • Large numbers of formulas or pivot tables.
  • Multiple divisions or entities to consolidate.
  • Spreadsheets rolled forward year after year with embedded formulas or links.
  • Using 'copy and paste' or manually typing numbers into cells.

When faced with these challenges, updating current processes and re-designing the spreadsheet approach to be fully Making Tax Digital link compliant can be more challenging and, if unsure, professional advice should be obtained.

Practical solutions

Although 'copy and paste' is specifically not allowed under digital links, there are other Excel functions that can achieve a similar outcome, so updating a spreadsheet and revising the existing process need not be complicated.

Certain steps can also often be eliminated and processes simplified. Possible process changes can, however, be difficult to identify when involved in the day-to-day detail or in the absence of a full understanding of why data is reported in a certain way.

This is when a review by an independent specialist can add value. For example, in relation to some processes where pivot tables are utilised these can be removed, simplifying the return and reducing the risk of error. Often significant reconciliation and analysis are included in a return, which does not need to be part of the digital journey.

In addition, a digital link review can often highlight other areas of non-compliance, such as:

  • Confusion around accounting for acquisition VAT and also reverse charge transactions. Some housing associations do not have VAT codes set up to deal with such transactions. In recent years, international purchases have increased as organisations seek to purchase at the most competitive price. This often results in acquisition VAT / reverse charge accounting either being missed all together, resulting in VAT accounting errors, or a heavily manual exercise to identify such transactions. Now is the ideal time to revisit VAT coding to ease reporting.

  • Issues with irrecoverable VAT and complications around ‘GL only’ transactions. Depending on the cause of the issue, there may be simple fixes such as reviewing tax codes, or more fundamental system updates may be required.

  • Partial exemption calculation adjustments can be made outside of the accounting system with digital links not being required for the calculation. However, it is still necessary to consider the calculation process, record requirements and how residual purchases are identified and coded.

    For example, VAT exempt rental income is often reported on a system that works on a weekly rent basis. Manual adjustments are then required to convert the income data into a quarterly format and ensure that the actual income value is used for VAT return reporting. Standard rated garage income has also been hard to identify for some housing associations where the income is reported on the same system as rents, and again a manual adjustment is required to get the correct income data before the partial exemption calculation is undertaken.