Making Tax Digital - 'Functional Compatible Software'

According to the UK Making Tax Digital (MTD) VAT rules, ‘Functional Compatible Software’ is a single program or set of programs, products or software applications that are able to:

  • Record and store VAT digital records
  • Transfer data between accounting software and HMRC filing without manual intervention or cutting and pasting in spreadsheets
  • Submit to HMRC data for the completion of VAT returns via HMRC’s Application Programming Interface (API) platform
  • Receive data and information in return from HMRC via the API platform

Where software is not able to perform all of the above requirements (for example a spreadsheet) it may be used in conjunction with other packages or bridging software to complete the digital journey. However, from 1 April 2021, no manual manipulation or copy and pasting may be used.

Digital links for data transfer

A digital link is an electronic or digital transfer or exchange of data between software programs, products and applications.

After 1 April 2021, where there is a transfer of VAT data between packages in the completion of the return, this must be done digitally without manual intervention. There must be digital links between the programs, apps etc., where there is any transfer, copy and pasting, recapture or modification of the data. Each piece of software must be digitally linked to create the digital journey.

Digital links may include:

  • A digital link may include linked cells on spreadsheets
  • Emailing spreadsheet or similar data where it is then uploaded into other software for the return preparation
  • Transfers via memory sticks or similar portable device
  • XML and .CSV imports or exports
  • API transfers
  • But excludes ‘cut and paste’ manual process to move data
  • Excludes manual adjustments and consolidations of group returns in spreadsheets.

Prior to 1 April 2021, HMRC provided a two-year digital link soft-landing. Until 31 March 2021, businesses were not required to have all digital links in place.

VAT return filings

The submission of the VAT return data, and any other supplementary data, must be via an API. This should be via API-enabled accounting software, but the following alternatives are acceptable:

  • Bridging software which connects accounting software to the HMRC API Platform, and allow data to be sent back and forth
  • API-enabled spreadsheets that incorporate the MTD APIs. They may record the VAT transactions themselves, or combine with accounting software to submit the VAT return data

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