Getting started with digital record keeping for MTD

What is digital record keeping?

Digital record keeping is the act of recording and storing records digitally. Traditionally, you might have had folders of paperwork and receipts as evidence of income and expenditure. Today, cloud-based accounting software means you can collect and store this information digitally, using functional, MTD compatible software that brings a range of business benefits.

What is digital record keeping for MTD?

Digital record keeping is an essential part of Making Tax Digital (MTD) - the government’s plan to digitalise the UK tax system.

For VAT-registered business, maintaining digital records is already mandatory under MTD rules.

With MTD for Income Tax Self Assessment (ITSA) coming into place from April 2026, self-employed people and landlords will need to brush up on their digital record keeping skills ahead of the deadline.

What are the benefits of digital record keeping?

While digital record keeping is important for MTD compliance, there are lots of other reasons to embrace it:

1. Improved accuracy Humans are prone to error. Typos and misplacing physical documents can lead to inaccurate financial reporting and even penalties. With digital record keeping, there are fewer opportunities to make mistakes.
2. Increased efficiency By keeping digital records in one centralised place, you can find and access them quickly, increasing efficiency.
3. Cost effective Storing, printing, copying and posting invoices and other tax-related records all incur costs. As long as you scan tax-related documents and store the record digitally, there's no need to keep a paper-based record, eliminating these costs.
4. Better organisation Organising and categorising your records digitally makes it much harder to misplace or lose important documents.
5. Simplified auditing and compliance Digital record keeping makes it easier to comply with legal and regulatory compliance. Using software means you’ll be able to produce financial statements and tax returns with data linked back to the digital records.
6. Improved collaboration Digital records can be shared securely online, so you can collaborate with other team members or your trusted advisor; there’s no need to share physical documents or paperwork.

HMRC digital record keeping: MTD requirements

There are two key requirements for digital record keeping under MTD rules: using functional compatible software and digital links. This applies to both MTD for VAT and MTD for ITSA.

Functional compatible software can be a single programme, app, or piece of software that supports digital record keeping and storage. It can also be a combination of programmes, apps, and software that allows you to keep and maintain your records digitally.

Digital links refer to the digital transfer of data within and between programmes, apps, software, and HMRC. We'll talk about digital links later on or you can learn more about digital linking rules here.

What digital records do I need to keep for VAT?

Designatory data: This is your basic business information. It includes the name of your business, your business address, VAT registration number, and details of any VAT accounting schemes you use.

Supplies made: This is the goods or services you are paid for. You must digitally record the time of supply, value of supply (excluding VAT), and the rate of VAT charged.

Supplies received: This is the goods or services you pay for. You must digitally record the time of supply, value of supply, and the amount of VAT you’ll claim.

Summary data: According to HMRC, for every VAT return, your functional compatible software must also contain:

• The total output tax you owe on sales
• The total tax you owe on acquisitions from EU member states
• Under a reverse charge procedure: the total tax you’re required to pay on behalf of your supplier
• The total tax you’re entitled to claim on business purchases
• The total input tax allowable on acquisitions from EU member states
• The total tax you owe or are entitled to reclaim following a correction or error adjustment
• Any other adjustment allowed or required by VAT rules

If you run charity fundraising events, there are also specific rules for recording supplies on VAT returns. Read about this here.

What digital records do I need to keep for ITSA?

For MTD for ITSA, self-employed people and landlords must keep digital records of all business transactions. These are the sales and purchases you make in your business.

There are some easements for landlords with joint-owned properties, following the 2023 Autumn Statement. You can read more about them in our guide on how the 2023 Autumn Statement impacts MTD.

Your income and expenditure accounts will be submitted quarterly, so must also be kept digitally.

Data retention

Businesses must retain VAT records for at least six years, and self-employed records for MTD for ITSA must be kept for at least five years after the 31 January Self Assessment tax return submission deadline of the relevant tax year.

Your records must be stored securely and be easily accessible for inspection by HMRC. It’s your responsibility to ensure the accuracy of your digital records. Review and reconcile your transactions regularly to ensure your records are complete and accurate.

Digital links

As part of MTD, HMRC requires that all information is transferred or exchanged digitally, without human intervention. For example, you couldn't note down details from an invoice in a ledger then use that information to manually update another part of your digital record keeping software.

Instead, the idea is to create an unbroken chain of digital information using digital links so every stage of your record keeping can be tracked. This creates a digital journey with data transferred between the different pieces of software in your accounting chain.

An example of this is using cloud-based software to generate your VAT return then sending it to HMRC directly from the platform. Another example is using a spreadsheet connected to bridging software. For the spreadsheet to meet digital linking requirements, you need to use spreadsheet formulas to automatically calculate totals elsewhere in the spreadsheet. This removes the need to manually update your spreadsheet.

You can learn more about digital link requirements in our guide.

MTD record keeping requirements: FAQs

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

Can I still use spreadsheets for MTD?

Yes, but it can get complicated for MTD. To use spreadsheets for MTD record keeping, you need to have bridging software that can transfer the data from your spreadsheet to HMRC.

If you do decide to use spreadsheets and bridging software, you won’t be able to cut and paste or copy and paste data within your spreadsheet. Instead, you’ll need to use spreadsheet formulas to update other cells or totals in the spreadsheet. These formulas count as digital links, which means you’re MTD compliant.

Can I still use paper records?

Yes, but only if you also have a digital version with the relevant data. For example, you can send and receive paper invoices, but you’ll need to make sure the transactional data is stored digitally in your functional compatible software. So that’s what was purchased or sold, and the price, time, and location of the purchase or sale.

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

Cons

• Spreadsheet formulas are necessary to comply with MTD, but these formulas can break.
• Unchecked, you could end up using inaccurate data on your VAT or income tax return and incur a penalty.
• As more transactions flow through your business, your spreadsheet will get bigger and could become harder to keep tidy.
• You’ll miss out on time-saving automation tools, like repeating invoices, invoice follow-ups, and bank rules.
• It’s easy to make spreadsheet inputting mistakes – avoid these with automation and cloud-based accounting software.

Pros

• There’s no need to learn a new piece of software - you can continue on an older system.
• There are no cloud accounting software fees to pay, although you may need to pay for bridging software.
• Spreadsheets are relatively quick and easy to set up.

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

It’s important to choose Making Tax Digital software that’s fully compliant with HMRC’s digital record keeping rules. Xero is MTD compliant, HMRC-recognised, and easy to use.

Features like invoicing, bank reconciliation, bank feeds, and reporting can help you run a healthier business while you meet HMRC digital record keeping requirements.