What Is A Digital Link for Making tax digital

What Is A Digital Link For Making Tax Digital (MTD)

Phase 2 of MTD for VAT will witness businesses implementing digital links to create an end-to-end digital reporting process as it has not become mandatory. But what is a digital link? Many might have already considered that their systems are digitalized keeping in mind that they hold all their data in the accounting system and make use of online spreadsheets to log the calculations, but these act as storage of the data. Under HMRC’s definition, these storages will be linked in order to reduce human involvement and any chances of errors.

Understand Digital Links

According to HMRC, a digital link is “exchange or transfer of data within and between software programs, applications or products which form functional compliant software [and these] must be digital if the information will continue to be part of the digital records” in VAT Notice 700/22. This can be misinterpreted easily and therefore the tax authority provides several compliance choices. These include:


Linking the cells between spreadsheets

– The data can be transmitted easily between spreadsheets using the formulas or macros to link cells.
– This data is later submitted to HMRC through an API-enabled spreadsheet


Upload/download or import/export of data

– Outputting the transmitted data from the source data digital records into a digital format such as XML or CSV.
– This is then imported into the calculation spreadsheet or software to create a compliant digital link.


Automated data transfer

– Data is transmitted between systems. This means that it can also be taken directly from accounting/ERP systems and uploaded into MTD software. Once the digital data is within this compatible software it’s possible to adjust.


Email or portable device

– Spreadsheets that contain digital records can be sent by e-mail or a portable device such as a memory stick, flash drive, etc. to a recipient (e.g. Advisor) for import into MTD software.

Digital linking essentially means digital connectivity must be built between the digital records and the return and between the return and HMRC to generate the digital chain. How this works when put into action can be seen through the simplified version of the pre-MTD reporting process below:

MTD - reporting before and after

Linear and Non-Linear Approaches

Digital linking is not inevitably linear in form. As per HMRC, “any additional transfer, recapture or amendments of that data should be carried out using digital links” and that means links could come even during the process. For example, if at the beginning of this procedure, source data used is set in several software programs then there should be digital links from each of these. Similarly, each group or entity must integrate and digitally submit their data to the reporting team.

A Non Liner example of Digital Linking in Action

Furthermore, the information can be added into the chain digitally even while the process is going on so that calculations, amendments or alterations can be done outside this process and factored back in. This does have its disadvantages. It will create additional intricacy and since it sees manual calculations carried out outside the process, it raises the risk of error.

A Digital Audit Record is Essential

HMRC goes on to state that “every single piece of software has to be digitally connected to other pieces of software to build a digital journey”.  This “digital journey” is a digital audit record which discloses an obvious unbroken transition from the digital record through to the VAT return numbers that are subsequently submitted to HMRC.

This is the digital audit trail that will be crucial in confirming compliance with the digital links mandate. The decreasing complications in the process are much more likely to result in a continuous chain so we think it’s recommended not to carry out changes and modifications outside of the process in manual spreadsheets.

Make the Most of Digital Linking

What’s better than using a dedicated software compliance engine as your MTD solution and implement the changes you make within the safety of this environment. It means you can perform even extremely complicated calculations inside the process itself. Reports further trace any changes that were made so if there is a query you will be able to follow back when and by whom a change was made to show compliance.

The compliance engine puts the return in a historical context as it gives access to Business Tax Account data. All liabilities, the filing receipts and VAT return summaries are recorded, which allows the solution to build-up, over time, and to mark up any possible inconsistencies. 

Making use of the compliance engine thereby assures you generate a linear end-to-end process that safeguards your digital links. Next, you can deliver compelling evidence of how calculations were done and demonstrate the link back to source data, thereby helping to rapidly address any queries from HMRC.


Lastly, a compliance automation tool is highly flexible as it has been updated using tax logic to prop up changes in legislation. In such a way, it not only meets growing demands under MTD for VAT but may even make certain compliance with other tax systems. If you want to get ready for MTD Phase II and have your systems digitally linked, then R7VAT is your one-stop solution to all your MTD for VAT related challenges. To know more you can write to us at hello@r7vat.com or simply give a call to +44-20-8099-1653

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