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Making Tax Digital for VAT - Enforcement of digital links rules from April 2021

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From April 2021, HMRC are enforcing the digital links rules under Making Tax Digital (MTD) for VAT. This is a quick guide to what's changing and what action you need to take.


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What is a digital link?

As part of Making Tax Digital (MTD) for VAT you must keep digital records and submit VAT returns electronically. You might do this in one application or across a group of applications.

HMRC advise that "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. "

For a more in-depth guide, take a look at our Sage Advice blog >

What's changing?

Since April 2019 HMRC have taken a soft landing approach to digital links, by allowing copying and pasting between applications in place of digital links, to give businesses time to adapt. However, this is changing from your first VAT return period starting on or after 1 April and failure to comply with the digital links rules in full may result in penalties.

For a more in-depth guide, take a look at our Sage Advice blog >

What do I need to do?

If you only use one application, for example Sage 50 Accounts, to record your accounts and submit your MTD VAT Returns, you don't need to do anything different.

If you currently use more than one application to store your data and submit your VAT Returns, you should review the processes you use. Any points where your data is amended or transferred manually should be reviewed to ensure they fall within HMRC guidelines on digital links.

Don't worry, this doesn't mean the end of spreadsheets or sending data to your accountant. You can find out more about what qualifies as a digital link in VAT Notice 700/22: Making Tax Digital for VAT.

To help you, we've covered some common examples below.

NOTE: This list is not exhaustive. For specific advice on whether your current processing practice is compliant we recommend you contact HMRC for guidance.

ExampleWill this be compliant after the end of the soft landing period?
I use only one piece of Sage software to record my transactions and submit my MTD VAT Return.Yes, you are not transferring data between applications.
I use the Sage MTD VAT module to pull my data from my Sage software and submit my MTD VAT Return.Yes, the transfer to the Sage MTD Module is a digital link.
I have several companies in my Sage software and I import the VAT Returns into the Sage MTD VAT module to submit my group VAT Return. Yes, the transfer to the Sage MTD Module is a digital link.
I import sales transactions from another application into my Sage software and manually enter other types of transactions. I then submit my MTD VAT Returns from SageYes, provided that either your sales software links directly to your Sage software, or it produces a file that you import into Sage without manual amends.
I use my Sage software for sales and different software for purchases. I post my total purchase VAT amounts as manual adjustments onto the VAT Return in my Sage software.No, manually entering purchase tax totals into your Sage software is not a digital link. You should consider other ways to transfer your data, for example, exporting your purchase data and importing it into Sage. 
I'm an accountant and my client sends me their backup by email. I restore this into my Sage software and submit their MTD VAT Return.Yes, HMRC accepts transferring digital records by email or a portable device such as a USB stick to then be imported into software.
My client sends me their VAT Return totals which I then type into a spreadsheet to submit through the Sage MTD module.No, manually entering the data into the spreadsheet is not classed as a digital link. You should consider other options, for example, can your spreadsheet be digitally linked to your client's data source?
I generate a blank Excel template using the MTD module and manually enter the VAT Return totals to submit an MTD VAT Return.
No, this would not be classed as a digital link. You should consider other options such as using formulae to bring in the values from the original data source to maintain a digital link.