MTD digital links explained | Sage Advice UK

The purpose of Making Tax Digital is, well, to ensure that businesses digitalise their VAT and Income Tax data and processes.

In order to ensure your taxes are digital, you also need to ensure transferring key accounting data from one place to another is not just done digitally. It must be done in a way that complies with the MTD digital linking rules.

Most notably, this means the following breaches HMRC’s MTD requirements and is not allowed:

• Manually cutting/copying and pasting key Income Tax or VAT accounting data after you’ve first entered it into software.
• Writing down this kind of data and then rekeying it into software.

Getting caught doing the above, along with a few similar gotchas, could invite penalties from HMRC. The most typical example sure to catch out most people is copying certain kinds of accounting data from a spreadsheet to your accounting software.

Are you one of the businesses doing digital linking the wrong way? And, if so, what can you do about it?

Read this article to find out. Here’s what it covers:

What are MTD digital links?

To be compliant with Making Tax Digital for VAT, businesses typically needed to shift their accounting to MTD-ready software. And this is now true for MTD for Income Tax, too, as of April 2026 for businesses with gross income over £50,000.

But what if you use more than one piece of software? Perhaps you use one for record keeping and one for submission. Or what if you use spreadsheets for part or all of your accounting. How do you make everything work together in a legal way?

A digital link is the solution.

It occurs when the accounting records required for MTD are transferred between two digital places, such as software or computing devices.

The rule is that key accounting data should only be entered once. After that, it should move in an automated, digital way.

A digital link also applies to recapturing or modifying the data when moving it between two digital places.

For example, a digital link exists when a business digitally transfers VAT accounting data to their accountant so a partial exemption can be calculated.

It also occurs when a business retains all transactions in a spreadsheet and uses a formula to calculate a total.

There are strict rules on what defines an MTD digital link. According to HMRC, they have two characteristics:

• Data is transferred electronically between software programs, products, or applications. This could include linked cells in a spreadsheet, such as a formula.
• The transfer is automated. It doesn’t need manual intervention such as copying over the data by hand or manually moving data between two or more pieces of software. But you can, of course, click a button to initiate the process.

When MTD for VAT was introduced, HMRC listed the following less obvious examples as digital links, although there are others too:

• Emailing a spreadsheet so it can be imported into software.
• Using a memory stick or pen drive, even if you physically hand this to somebody else who then imports the data into their software.
• CSV or XML import and export, including the downloading and uploading of files.
• API: This is the technology used when software or computers talk to each other to transfer data. It’s how accounting software talks to HMRC’s computers in order to submit your VAT return, for example.

HMRC is keen on digital links not because it wants to make things more difficult. It wants to reduce the potential for errors.

Fewer errors mean a reduced possibility of penalties for businesses and, of course, it means HMRC gets all the taxes it’s due.

The introduction of MTD digital links shows that HMRC was also pointing to how automation can help businesses.

The more of your accounting that’s automated, the more you can focus on building your business. In this way, HMRC hopes to address the productivity gap that businesses are struggling with.

What is not considered an MTD digital link?

As mentioned, what is considered a digital link is perhaps surprisingly inclusive.

But when MTD for VAT was launched back in 2019, HMRC said one thing is definitely not a digital link: ‘cut and paste’ or ‘copy and paste’ to select and move information, either within a software program or between software programs.

There are slightly different rules for making VAT input/output adjustments, as we’ll explain in a minute.

But it’s otherwise correct to say that cut/copy and paste must never be used in the presence of the accounting records required for MTD for Income Tax, or VAT.

Adjustments to the input or output tax are treated differently with VAT (notably, the specific adjustments are outlined in section 4.4 of the official VAT Notice).

The total of the adjustment must be kept as a digital record but the calculation you use to create it in a spreadsheet does not need to be digitally linked (although it should be retained for your VAT record keeping).

Adjustments can be manually journaled into your VAT accounting.

In other words, the above is the one instance in the world of MTD where it’s OK to manually type figures or cut/copy and paste (provided the data isn’t pasted directly into one of the nine boxes of the actual VAT return, which isn’t allowed under the MTD rules).

How does the digital linking requirement affect MTD for Income Tax?

HMRC emphasises that, to be compliant with MTD for Income Tax, you’ll need to ensure the following is in place:

• Digital records: Depending on your type of business, and its turnover, HMRC says you need to keep certain key accounting records relating to Income Tax in a digital format.
• Using MTD-ready software: You must create, store and correct digital records and send quarterly updates and a tax return via software that works with MTD for Income Tax.
• Spreadsheets: HMRC’s guidance explicitly says if you “prefer to stick to spreadsheets or software you already use”, you’ll need to add-in bridging software to make it work with MTD for Income Tax—although it recommends dedicated accounting software for “timesaving, user-friendly features”.

However, while the emphasis from HMRC for MTD for Income Tax is on ensuring digital record keeping is in place, the rules around digital linking still apply.

It does not comply with MTD requirements to copy and paste key Income Tax records between spreadsheets, for example. It does not comply with MTD requirements to scribble down records from one place, and rekey them into software.

MTD digital links: misunderstandings and myths

Perhaps understandably, there’s been some confusion about the ongoing MTD digital links compliance and the digital linking requirements. Let’s clear up some misunderstandings, as follows.

Spreadsheets

Put simply, MTD does not mean the end of spreadsheets in your accounting.

Spreadsheets can be used alone if they’re MTD API-enabled so they can record and submit digital transactions. Bridging software is what provides this.

Or spreadsheets can be used as part of a larger software suite, assuming there are digital links in place between all the software used. Remember: No copy and paste for the key accounting tax data!

However, using spreadsheets for all of your VAT or Income Tax accounting can be problematic, as explained below—see “MTD digital linking for MTD and spreadsheets”, below.

Manual adjustments

As mentioned earlier, getting digital linking right does not mean the end of manual adjustments for things like the VAT capital goods scheme, partial exemption and so on.

Manual adjustments prior to submission are completely acceptable as long as digital links are in place.

Here’s a basic example.

Based on the underlying transactions, my software records VAT box 1 as £1,000.

I then make a manual adjustment in my accounting for £100 (for which I have supporting evidence/calculations), and the software automatically calculates that the revised box 1 figure is £1,100.

This is acceptable.

What would not be acceptable is if, based on the underlying transactions, my software records VAT box 1 as £1,000 and I then manually overwrite this figure with £1,100.

What to do if your MTD digital links aren’t legal

What do you do right now if you’re using cut/copy and paste for your MTD-related accounting?

The answer might not be as drastic as simply avoiding the good old cut and paste.

First, check if the data you’re cut/copying and pasting is that specified as a digital record for the purposes of either MTD for Income Tax, or VAT. Remember that MTD only affects your tax records, such as income and expenditure for MTD for Income Tax. It doesn’t affect all of your accounting data, such as sales records if yours is a retail business, or payroll records if you employ staff.

Another example: VAT retail schemes only need to keep a digital record of their daily gross takings (DGT). The supplies that make up the DGT are outside the scope of MTD’s record-keeping requirements. In other words, if you cut/copy and paste data relating to these supplies then you can continue to do so.

If you’re using the VAT Flat Rate Scheme, you don’t need to keep digital records of your purchases (unless they’re capital expenditure goods on which the input tax can be claimed). So, you can happily cut/copy and paste data relating to these purchases.

A rule of thumb for VAT is that MTD record-keeping requirements cease at the invoice or receipt level. For example, you can handwrite invoices, if you like, provided the transactional data is transferred to your digital VAT accounting solution as soon as possible.

You need to transfer the tax point date, the value of the sale, the VAT rate applied, and the VAT element from the invoice.

However, you should seek expert advice from an accountant or HMRC if you’re uncertain about what constitutes digital records in your business. Remember, you could get penalised by HMRC if you get it wrong.

Of course, the simple solution is to use MTD-ready software, like MTD for VAT-compatible accounting software. If you issue invoices from the software or log your supplies using it, then you don’t even have to think about record keeping.

Somebody else has sweated the details for you.

When the time comes for your tax return to be submitted, you can simply click a button and, in most cases, everything will be filled in and ready to go.

MTD digital linking for MTD and spreadsheets

Spreadsheets are computing’s greatest gift to the world of accounting. But their use for accounting has obviously become problematic since the introduction of MTD.

Some businesses have attempted to get around this by using bridging software that hooks into the spreadsheet and is able to submit updates or tax returns to HMRC digitally.

Experts say bridging software has a limited life, ideally to ease transition to MTD processes, even though HMRC suggests it can be used indefinitely.

Here’s an example. Let’s say you track your invoices using one spreadsheet and calculate your VAT using another spreadsheet. Getting data from one spreadsheet to the other is problematic if you can’t use cut/copy and paste.

Spreadsheet formulas are considered MTD digital links, so you could build one to take the data from the invoice sheet automatically.

But any experienced spreadsheet user will know this is a recipe for frustration. This kind of formula can break too easily. And it’s extremely easy to accidentally overtype cells, meaning the data or formula is instantly lost.

Finding a new accounting system that can cope with this analysis would be a better long-term solution.

Final thoughts about MTD digital links

If you need expert advice, consult an accountant, VAT specialist or HMRC sooner rather than later.

Penalties for incorrect accounting are very real and could end up costing your business. Any expense you might resent spending upfront should be considered alongside this.

Is it really worth the risk of thousands of pounds, or even more, when you can not only fix things right now with a full accounting solution but also transform the way you work and make life so much easier?

Editor’s note: This article was first published in December 2019 and has been updated several times for relevance.