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MAKING TAX DIGITAL
How to keep digital tax records for MTD: A guide for small businesses
If you’re a small business owner, it’s not always clear what records to keep, how to keep them, or why it matters. With MTD on the horizon, now is a great time to switch to digital.
What is digital record-keeping?
Keeping digital records means storing your business records electronically, not physically.
For small businesses, this can mean recording information about sales, expenses, and taxes in spreadsheets, rather than writing them in a notebook and keeping paper receipts.
Digital record-keeping can also refer to using accounting software for your finances.
Are digital records needed for Making Tax Digital?
Making Tax Digital is a government incentive aiming to make paying tax easier.
Some businesses now need to keep tax records using MTD compatible software. Not only are digital records required for Making Tax Digital, but they must be kept in a certain way.
If MTD applies to your small business, you’ll also have to submit MTD returns digitally.
Does MTD apply to my business?
What are HMRC’s requirements for digital tax record-keeping?
HMRC has specific rules for digital tax record-keeping, depending on the type of business and whether you’re signed up for MTD for VAT or MTD for Income Tax (MTD for IT).
VAT record requirements
If your small business is registered for VAT, you should already be doing the following:
Using MTD-compatible software to submit your VAT returns to HMRC
If you use a combination of both spreadsheets and software, they must be connected with a digital link (copying and pasting data is not MTD-compliant)
Making digital records of your sales, purchases, and VAT information (for example, the total tax you owe, how much you’re entitled to claim, and EU member tax)
Submitting VAT returns quarterly (every three months), monthly or annually using software
Recording and submitting VAT returns digitally became mandatory for VAT-registered businesses from April 2022, even if turnover is below the £85,000 VAT threshold.
Income Tax record requirements
If you’re self-employed or a landlord earning over £50,000 a year, you’ll need to follow MTD for Income Tax from April 2026. From April 2027, this threshold lowers to £30,000 a year.
Here’s what you’ll need to do from April 2026, if MTD for Income Tax rules apply to you:
Use MTD-compatible software to submit regular updates to HMRC
If you use a combination of both spreadsheets and software, they must be connected with a digital link (copying and pasting data is not MTD-compliant)
Keep digital records of business income, expenses, and adjustments
Submit a quarterly summary of your income and expenses using software
Submit an end-of-period statement and final declaration using software
Unsure whether this applies to your business? Read our guide to MTD for Income Tax.
MTD for VAT vs. MTD for Income Tax
| MTD for VAT | MTD for Income Tax |
Applies to: | VAT-registered businesses | Self-employed businesses and landlords earning over £50,000 (from April 2026) |
Active from: | From April 2022 | From April 2026 |
Requirements: | Submit VAT returns | Submit income and expenses updates, end-of-period statements and final declarations |
Submission requirements: | Quarterly or Monthly or Annually | Quarterly + annual statements |
Record keeping requirements: | Record sales and purchases related to VAT, VAT invoices, adjustments | Record income and expenses, business mileage, adjustments |
What if I’m using spreadsheets for my accounting?
If you’re using spreadsheets for your accounting, you may already be keeping digital tax records! So it’s easier to adapt to MTD changes than if you’re using physical folders or notebooks.
HMRC requires information to be transferred digitally, without manual copying or retyping. You can’t take figures from a spreadsheet and enter them into your tax software by hand.
To create an MTD-approved digital link, bridging software like QuickBooks can make the process much easier.
Or, read our practical guides to switching to QuickBooks from Excel or Google Sheets.
How else do digital records benefit your business?
Making Tax Digital was introduced to help small businesses ‘get their tax right’.
However, you don’t need to wait until the MTD deadlines to switch your record-keeping to digital. Here are some ways digital records can save your small business time and effort.
Streamlined record-keeping
Forget rummaging through files and paper receipts, cloud-based software allows you to find and share data online easily. Keep digital records of invoices, bills, and tax owed.
If you require your financial data to apply for funding or a loan, it’s all there for you.
Easier expense tracking
Snap and record receipts on the go, and keep everything securely in one place.
Accounting software like QuickBooks allows you to categorise income and expenses with a tagging system, helping you get a bigger picture of where you’re gaining or losing money.
And when it comes to claiming back expenses, expense tracking can help reduce your bill.
More effective long-term financial planning
See your profit and loss over extended periods, helping you make better decisions. Keeping digital financial reports allows you to see patterns easily and plan ahead.
More accurate cash flow management
Digital tools allow you to track income and expenses in real time. Spot unusual drops or rises before they’re an issue, without having to check through notepads with a calculator.
With a bird’s eye view of your cash flow, you can act fast and protect your business.
Digital record-keeping saves time
Recording all financial data manually can take up valuable time for your business.
Software can automate many tasks, such as writing transactions or chasing invoices. With less admin time and fewer chances of human errors, you can focus on growth.
To save even more time, hire an accountant and give them access to your records.
How can I prepare digital tax records effectively?
Preparing your digital tax records digitally may seem like a big step, especially if you’ve always used physical files or paper receipts. But, it doesn’t have to be complicated.
Here’s how to organise your current records and meet HMRC’s requirements.
Choose MTD compatible software: If MTD rules apply to you, you’ll need to use HMRC approved software to submit your tax returns and updates digitally.
Organise past and present records: It takes time, but migrating records to new software can help you see a bigger picture of your financial health. Once you’re set up, ensure you upload and categorise your receipts, invoices, and transactions.
Create a digital link for spreadsheets: If you decide to keep using spreadsheets, you will need to link to MTD recognised software with a digital link (no copying and pasting).
Track deadlines for submissions: Some accounting software can help you keep track of HMRC’s tax return submission deadlines, helping you avoid penalties.
If you’re ready to upgrade your accounting, QuickBooks can help you save time on admin.
Transfer your tax records to accounting software to have a better overview of your financial health, automate repetitive admin tasks, and make submitting your data to HMRC easier.
Happy to stick with spreadsheets for now? Our bridging software makes MTD fuss-free.
Digital record keeping FAQs
How long do I need to retain digital records for?
The average small business should retain digital records like tax returns, financial reports and accounting records for at least 6 years, in case HMRC wants to review them.
What are digital links?
Digital links connect spreadsheets to MTD compatible software, allowing the data to transfer automatically between them. Copying and pasting is not allowed by HMRC.
Can I still use paper copies for accounting?
Yes, but if MTD rules apply to you, you’ll need to keep digital records too using compatible software. Switching to digital records from paper can also save you time in the long run.
The information on this website is provided free of charge and is intended to be helpful to a wide range of businesses. Because of its general nature the information cannot be taken as comprehensive and they do not constitute and should never be used as a substitute for legal, accounting, tax or professional advice. We cannot guarantee that the information applies to the individual circumstances of your business. Despite our best efforts it is possible that some information may be out of date. Any reliance you place on information found on this site or linked to on other websites will be at your own risk.
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