Digital record keeping: Stay compliant with MTD rules

Published Tuesday 16 December 2025

Table of contents

• What is digital record keeping?
• What is digital record keeping for MTD?
• What are the benefits of digital record keeping?
• How to set up digital record keeping
• HMRC digital record keeping: MTD requirements
• Let Xero help you stay compliant with MTD
• FAQs on digital record keeping for MTD

Key takeaways

• Select software that's compatible with Making Tax Digital (MTD) to automatically capture, store, and process your financial data electronically. Connect your business bank accounts to the software and use mobile apps to photograph and digitise receipts and invoices. This creates an unbroken digital chain from the initial transaction all the way through to your submission to HMRC.
• Set up digital links between all your software systems so data transfers automatically without you needing to manually copy, retype, or cut-and-paste information. HMRC requires this seamless digital connection to meet compliance standards.
• Keep comprehensive digital records of all your sales and income transactions, business purchases and expenses, VAT calculations, and business information. You'll need to retain VAT records for at least six years and income tax records for at least five years after the 31 January Self Assessment deadline.
• Implement regular reconciliation and review processes to make sure your digital records stay accurate and complete. You're responsible for the accuracy of all your electronically stored financial data, so it's important to check your records regularly.

What is digital record keeping?

Digital record keeping is the process of storing business financial information electronically rather than on paper. Instead of traditional filing cabinets and folders, you use cloud-based software that automatically captures, organises, and stores your income and expense data for you.

Modern digital systems offer significant advantages over paper records. You'll save time on admin, reduce the risk of errors from manual data entry, and meet MTD compliance requirements automatically.

What is digital record keeping for MTD?

Digital record keeping for MTD refers to the mandatory requirements set out in HMRC's Making Tax Digital regulations. These rules require businesses to store financial records electronically and submit tax returns digitally to HMRC.

Making Tax Digital is being rolled out in stages. Here's who needs to comply and when:

Current requirements:

• Businesses registered for value added tax (VAT): Digital record keeping has been mandatory since 2019
• Sole traders and landlords with qualifying income of £50,000 or more: From April 2026
• Sole traders and landlords with qualifying income of £30,000 or more: From April 2027
• Sole traders and landlords with qualifying income of £20,000 or more: From April 2028

What are the benefits of digital record keeping?

Digital record keeping benefits go far beyond simply meeting MTD compliance requirements. Modern digital systems make it much easier to manage your business finances day-to-day:

• Improved accuracy: Digital systems eliminate manual data entry errors and reduce the risk of losing important documents
• Increased efficiency: Centralised storage means you can find any record instantly, rather than searching through filing cabinets
• Cost savings: You'll save money on printing, copying, and physical storage space
• Better organisation: Digital categorisation and tagging prevent documents from being misplaced or misfiled
• Simplified compliance: Automated reporting makes audits and tax returns much easier to prepare
• Enhanced collaboration: Secure online access means you can work with your accountant or bookkeeper remotely, sharing information in real-time

How to set up digital record keeping

Getting started with digital record keeping is straightforward. Following these simple steps will help you stay compliant with MTD requirements and make your financial admin much easier to manage.

1. Choose your software. Select software that's compatible with MTD rules and fits your business needs. This software will become the central hub for all your financial records. Look for software that's been recognised by HMRC as MTD-compatible.
2. Connect your bank accounts. Link your business bank accounts to your chosen software. This connection automates the flow of transaction data into your records, saving you significant time on manual data entry and reducing the risk of errors.
3. Digitise your paperwork. Use your software's mobile app to snap photos of receipts and invoices as soon as you receive them. This captures the data instantly and stores it securely in the cloud, so you won't lose important receipts or forget to record expenses.
4. Set up digital links. If you use more than one piece of software (like a spreadsheet and bridging software), make sure they're digitally linked so data transfers automatically between them without manual copy-pasting. This is a key MTD requirement.

HMRC digital record keeping: MTD requirements

MTD digital record keeping requirements have two essential components. These apply to both VAT and Income Tax under Making Tax Digital:

Functional compatible software:

You need to use software that HMRC recognises as compatible with MTD. This can be:

• A single accounting program that stores all your records digitally
• Multiple connected programs that work together (for example, a spreadsheet linked to bridging software)
• Whatever option you choose, the software must be able to capture, store, and process your financial data electronically

Digital links:

Your software systems must transfer data automatically between each other. This means:

• Automatic data transfer between different software systems you use
• No manual copying or retyping of information from one system to another
• Creating an unbroken digital chain from your initial record all the way through to your HMRC submission

What digital records do I need to keep for VAT?

VAT digital records must include these essential data categories:

Business information:

• Your business name and address
• Your VAT registration number
• Details of any VAT schemes you use (such as the Flat Rate Scheme or Cash Accounting Scheme)

Sales records (supplies you've made):

For each sale, you need to record:

• The time of supply (when the sale took place)
• The value of the sale excluding VAT
• The VAT rate you applied

Purchase records (supplies you've received):

For each purchase, you need to record:

• The time of supply (when the purchase took place)
• The value of the goods or services you purchased
• The amount of VAT you're claiming back

VAT return calculations:

Your records must show how you calculated the figures on your VAT return, including:

• Total output tax on your sales
• VAT on acquisitions from EU countries (if applicable)
• Reverse charge VAT payments
• Input tax you're claiming back
• Any VAT adjustments and corrections

If you run charity fundraising events, there are specific rules for how you record supplies on your VAT returns. You can read more detail in HMRC's VAT Notice 700/22 on Making Tax Digital for VAT.

What digital records do I need to keep for income tax?

Income tax digital records require you to store all your business financial data digitally. This includes:

Required records:

• All sales and income transactions (every payment you receive for your business)
• All business purchases and expenses (everything you spend on running your business)
• Quarterly income and expenditure summaries that you'll submit to HMRC

Special provisions:

• If you jointly own property with someone else, there are specific easements (simplified rules) that have applied since the 2023 Autumn Statement
• Your records must be detailed enough to support the quarterly digital submissions you make to HMRC

Data retention

You must keep your digital records for a minimum period, even after you've submitted your tax returns.

For VAT, businesses must keep records for at least six years. If you're self-employed and using Making Tax Digital for Income Tax, you must keep your records for at least five years after the 31 January Self Assessment tax return deadline for that tax year.

You must store your records securely and keep them easy to access in case HMRC needs to inspect them. It's your responsibility to make sure your digital records are accurate. Review and reconcile your transactions regularly to check your records are complete and correct.

Digital links

Digital links are connections between software systems that eliminate the need for manual data entry. HMRC requires automatic data transfer without human intervention to maintain the integrity of your records.

What digital links prevent:

Digital links mean you can't:

• Manually copy figures from invoices into ledgers
• Retype data when moving it between different software programs
• Use cut-and-paste operations to move data within spreadsheets

How digital links work in practice:

• Cloud-based accounting software: Your transaction data flows automatically into the software, which then generates and submits both VAT returns and Income Tax quarterly updates directly to HMRC without manual intervention
• Spreadsheets: You use formulas to calculate totals automatically, rather than typing in figures manually
• Bridging software: This connects your spreadsheets to HMRC's systems digitally, allowing automatic submission of both VAT returns and Income Tax information

Key principle: The goal is to create an unbroken digital chain from your initial transaction all the way through to your final HMRC submission, with no manual intervention that could introduce errors.

You can learn more detail about this requirement in the guide to digital link requirements.

Let Xero help you stay compliant with MTD

Xero's accounting software is HMRC-recognised and makes it simple to keep digital records and submit returns directly to HMRC. You'll benefit from automatic bank feeds that capture transactions in real-time, secure cloud storage that keeps your financial data safe and accessible from anywhere, and seamless digital links that eliminate manual data entry. Beyond MTD compliance, Xero helps you run a healthier business with features like automated invoicing, bank reconciliation, and real-time reporting that give you a clear view of your cash flow. Explore Xero's MTD software to see how easy digital record keeping can be.

FAQs on digital record keeping for MTD

If you still have questions about digital record keeping requirements, check out these frequently asked questions:

Can I still use spreadsheets for MTD?

Yes, you can still use spreadsheets for MTD, but there are important requirements. You'll need bridging software to connect your spreadsheets to HMRC digitally. You must also use formulas to calculate figures automatically instead of typing them in manually. This maintains the digital links that HMRC requires.

Can I still use paper records?

You can still receive paper invoices and receipts from suppliers, but you must store all the transaction data digitally in MTD-compatible software. This means you'll need to either scan paper documents or enter the information into your digital system.

What are the pros and cons of using spreadsheets for MTD record keeping?

Here's what you need to know about the advantages and disadvantages of using spreadsheets for MTD:

Disadvantages:

• Formula complexity: The formulas required to maintain digital links can break accidentally, causing errors in your records
• Error risk: Mistakes in spreadsheets can lead to incorrect returns and potential penalties from HMRC
• Manual effort: Spreadsheets don't offer automation for tasks like invoicing, bank feeds, or reporting, so you'll spend more time on admin
• Scalability issues: As your business grows and transaction volume increases, spreadsheets become increasingly difficult to manage

Advantages of accounting software:

• Automatic updates: Software stays current with HMRC requirements automatically, so you don't need to worry about regulatory changes
• Real-time visibility: Automated bank connections give you an up-to-date view of your business finances at any time
• Seamless submissions: Direct connection to HMRC means you can submit returns with just a few clicks
• Robust reporting: Advanced reporting capabilities help you understand your business performance and make better decisions
• Familiarity: If you already use spreadsheets, you can continue using your existing system knowledge
• Quick setup: Initial implementation can be faster than learning new software from scratch

What software can I use for digital record keeping for MTD?

Use HMRC-recognised software like Xero that handles digital record storage and automatic HMRC submissions.

Look for software that includes features like invoicing, bank reconciliation, automatic bank feeds, and reporting. These features not only help you meet HMRC digital record keeping requirements but also help you run a healthier, more efficient business.

What are examples of digital records?

Digital records can include a wide range of file types. Common examples include scanned documents like invoices or receipts, digital photographs of expenses taken on your phone, audio or video files, and electronic spreadsheets. Essentially, any business record that you create or store on a computer, phone, tablet, or in the cloud counts as a digital record.