Making Tax Digital – are you ready for the April 2021 changes?

17 Dec 2020

Making Tax Digital for VAT (MTDfv) first affected how businesses file their VAT returns from April 2019.  At this time, HMRC announced there would a ‘soft landing period’ for 12 months to allow businesses to fully implement the MTD requirements relating to digital record keeping and digital links.  In March 2020, HMRC extended this by a further 12 months and it seems very unlikely there will be another extension.


Phase 2 of MTDfv will therefore come into effect on 1 April 2021 when the soft landing period ends.  HMRC will expect all businesses signed up to MTDfv to comply from this date and we’ve summarised below what this means.

Digital record keeping

UK VAT registered signed up to MTDfv must keep and maintain relevant VAT records digitally within ‘functional compatible software’.

What is functional compatible software for digital tax?

This is a software program, or set of software programs, products and applications which are used to hold the financial records.  It could be an Excel spreadsheet, multiple Excel spreadsheets, or could be bookkeeping software which may also have a number of add-on applications.


Digital links

Where a business uses more than one piece of software, or multiple Excel sheets, all software or Excel sheets must be digitally linked.  This means no more copying and pasting within spreadsheets or manually entering figures taken from one document/sheet onto another.


Can I still use Excel and bridging software for online tax?

Yes, bridging software used with spreadsheets to file VAT returns is still acceptable, however the final VAT return figures must also have a digital link back to documents used for online record keeping.  This means figures can no longer be manually typed onto the VAT return summary for submission to HMRC.


Deadline extensions for tax

HMRC has offered an option for businesses to apply for an extension to the digital links deadline if you can demonstrate it will take a longer period to put digital links in place between legacy IT systems.  However, before applying please consider that most businesses will have had from at least April 2019 or October 2019 to consider digital links.  In addition, using cost alone as a reason not to comply is unlikely to be sufficient (other criteria also apply).

Exemptions from digital tax

Businesses can also apply to HMRC if it is not possible to comply with these regulations.  Businesses applying to HMRC for this reason must include a comprehensive plan to resolve any break in the transfer of data digitally and it’s likely an exemption would only be granted if there are significant blockers to implementing digitally linked software.  Again, cost alone is unlikely to be a sufficient reason (although could be used in combination with other reasons) and if there is a software solution available which could resolve the issue it’s likely any applications for an exemption will be declined.  More information on exemptions can be found here.


Digital Tax Penalties

It is likely that HMRC VAT enquiries after 1 April 2021 will include a check on digital record keeping and links across functional compatible software.  Penalties for not keeping digital records or maintaining digital data transfers will apply from 1 April 2021, based on the standard VAT penalty regime.

It is clear that HMRC are continuing to push forward with their MTD plans and there will be changes ahead for business voluntarily registered for VAT (from April 2022), MTD for income tax (from April 2023) and MTD for corporation tax (2026 at the earliest).

Digital Tax Help at WR Partners

We therefore encourage all businesses to ensure they will comply with the April 2021 changes as soon as possible.  If you’re not sure and would like to discuss these changes with us please speak with your usual WR contact or our Digital Solutions team on 01743 273273 or email who can help identify any areas of concern and suggest possible solutions.

Written by Andrew Richardson | Digital Solutions Senior Manager

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