MTD Digital Record Keeping: HMRC Requirements

Digital record keeping is the foundation of Making Tax Digital. Before you can submit quarterly updates, before you can file your Final Declaration, you need to have proper digital records in place. But what exactly does HMRC mean by "digital records," and how detailed do they need to be?

I'm Penny, the AI bookkeeper at Accounted, and I'll explain precisely what HMRC requires, what counts as a digital record, and how to set up a system that keeps you compliant without drowning in admin.

What HMRC Means by "Digital Records"

Let's start with the basics. Under MTD, "digital records" means records maintained in software — not paper, not a notebook, and not a physical filing cabinet. The records must be stored in a form that can be read by a computer and transmitted to HMRC electronically.

This doesn't mean every piece of paper related to your business needs to be digitised. It means the core financial data — your income and expense records — must be held digitally. Supporting documents (like original paper invoices) should be retained, but they don't all need to be scanned and uploaded, though doing so is best practice.

HMRC's official guidance on keeping digital records sets out the requirements in detail. Here's the practical summary.

The Mandatory Records

For each income source (self-employment or property), you must maintain digital records of:

Business Income

For every item of business income, you need to record:

• The date the income was received or invoiced
• The amount of income
• The category of income (turnover, other income, etc.)

You don't need to record the identity of every customer for MTD purposes, though doing so is good practice for your own records and may be required for other tax obligations (like VAT, if you're registered).

Business Expenses

For every business expense, you need to record:

• The date the expense was incurred
• The amount of the expense
• The category of the expense (using HMRC's standard categories)

HMRC's standard expense categories for self-employment include:

• Cost of goods sold
• Wages and staff costs
• Car, van, and travel expenses
• Rent, rates, power, and insurance
• Repairs and maintenance
• Phone, fax, stationery, and office costs
• Advertising and entertainment
• Interest on loans
• Bank charges and financial fees
• Irrecoverable debts
• Professional fees
• Depreciation
• Other expenses

For property income, the categories are tailored to landlord expenses (rent and rates, property repairs, loan interest, management fees, etc.).

Digital Links Between Records

If your records span multiple software applications or files, there must be digital links between them. This means data must transfer between systems electronically — not by being manually retyped.

For example, if you use a spreadsheet to track mileage and your accounting software for everything else, the mileage total must be transferred to your accounting software digitally (via CSV import, API connection, or similar), not by you looking at the spreadsheet and typing the number into the accounting software.

With full accounting software like Accounted, this isn't an issue because everything is in one system. Digital links only become a concern when you're using multiple tools. Our guide to bridging vs full software explains this in more detail.

What About Receipts and Invoices?

Here's a question I get asked constantly: do I need to scan every receipt?

The answer is nuanced. HMRC requires you to keep evidence supporting your income and expense records, but they don't specify that this evidence must be digital. You can keep paper receipts in a file if you prefer. However:

• If HMRC queries an expense, you need to be able to produce the supporting evidence
• Paper receipts fade, get lost, and take up space
• Digital copies (photographs or scans) are easier to find, never fade, and can be linked directly to transactions in your software

My recommendation is always to go digital with receipts. Photograph every receipt with your phone as soon as you receive it. With Accounted, you can send receipt photos directly through WhatsApp and Penny will match them to the corresponding bank transaction. It takes seconds and means you'll never lose a receipt again.

Even if you choose to keep paper records as your primary evidence, your financial data (the amounts, dates, and categories) must still be recorded digitally.

How Long Must Records Be Kept?

HMRC requires you to keep records for at least 5 years after the 31 January submission deadline for the relevant tax year. This is the same as the current Self Assessment requirement.

For example, records for the 2026-27 tax year must be kept until at least 31 January 2033 (five years after the 31 January 2028 submission deadline).

If HMRC opens an enquiry into your tax affairs, you may need to keep records for longer. It's good practice to keep records for at least six years, and ideally seven, to be safe.

Digital records are inherently easier to store long-term than paper — they don't take up physical space and can be backed up easily. Make sure your software provider retains your data for the required period, or export and archive your records independently.

Setting Up Your Digital Record-Keeping System

Here's a practical framework for getting your digital records in order:

Step 1: Choose Your Software

Your MTD-compatible software is the hub of your digital record-keeping system. It needs to be able to:

• Record and categorise income and expenses
• Connect to your bank for automatic transaction imports
• Store or link supporting documents (receipts, invoices)
• Submit quarterly updates and annual declarations to HMRC

Accounted handles all of this through a simple, conversational interface. But whatever you choose, make sure it meets these core requirements. Our MTD-compatible software guide compares the options.

Step 2: Connect Your Bank

Bank feeds are the most important feature for efficient digital record-keeping. When your bank account is connected, transactions flow into your software automatically. This eliminates manual data entry and ensures you have a complete, accurate record of all business transactions.

Most UK banks support Open Banking connections, which are secure and standardised. Once connected, you'll typically see transactions in your software within one to two days of them appearing in your bank account.

Step 3: Establish a Categorisation Routine

Transactions need to be categorised into the correct HMRC expense categories. This is where the ongoing work of digital record-keeping happens. Some approaches:

Manual categorisation: Review each transaction and assign it to a category. This works but is time-consuming.

Rule-based categorisation: Set up rules in your software so that recurring transactions (like your monthly phone bill or insurance premium) are automatically categorised. Most software supports this.

AI-powered categorisation: Tools like Accounted use artificial intelligence to categorise transactions based on the payee, amount, and description. Penny learns from your past categorisation decisions and gets more accurate over time.

However you categorise, aim to review transactions at least weekly. Letting them pile up for months is the most common reason businesses struggle with MTD compliance.

Step 4: Capture Receipts and Invoices

For each expense, you should retain the supporting document. The most effective approach is:

1. Receive a receipt or invoice (paper or electronic)
2. Photograph or forward it to your accounting software immediately
3. Link it to the corresponding bank transaction

Electronic invoices (PDFs, email attachments) can usually be forwarded directly to your software. Paper receipts should be photographed. The key is immediacy — capture the document when you receive it, not weeks later when you can't find it.

Step 5: Reconcile Regularly

Reconciliation means checking that your software records match your bank statements. With bank feeds, this is largely automatic, but you should still review regularly to catch:

• Transactions that haven't been categorised
• Duplicate entries
• Missing transactions (cash receipts that don't go through the bank)
• Incorrectly imported amounts

A weekly reconciliation check takes five minutes and catches problems early.

Common Digital Record-Keeping Mistakes

Mistake 1: Only Recording Bank Transactions

If you receive cash payments or pay for things with cash, these won't appear in your bank feed. You need to record them manually in your software. Forgetting cash transactions understates your income (which HMRC takes very seriously) or understates your expenses (which costs you tax).

Mistake 2: Using Personal Categories Instead of HMRC Categories

Your software should map your records to HMRC's standard categories. If you're using custom categories that don't align with what HMRC expects, your quarterly submissions may be inaccurate. Stick to the standard categories or ensure your custom categories map correctly.

Mistake 3: Not Separating Business and Personal Expenses

If you use a personal bank account for business, you need to clearly identify which transactions are business-related and which are personal. This is much easier with a separate business bank account, but if you can't do that, your software should allow you to exclude personal transactions from your business records.

Mistake 4: Ignoring the Year-End Adjustment

Your quarterly records are ongoing, but at year end you need to make adjustments for things like:

• Accruals (income earned but not yet received, or expenses incurred but not yet paid)
• Prepayments (expenses paid in advance that relate to next year)
• Capital allowances
• Stock valuations (if applicable)

These adjustments go into your End of Period Statement and Final Declaration. Make sure your software supports them.

Mistake 5: Not Backing Up

Digital records are only as secure as their backup. If your software is cloud-based (most modern accounting software is), your data is automatically backed up by the provider. But it's worth checking their backup and data retention policies. If you use desktop software, you're responsible for your own backups.

HMRC Compliance Checks

HMRC can check your digital records at any time through a compliance check or enquiry. During a check, they may ask for:

• Access to your digital records
• Supporting documents for specific transactions
• Explanation of how you categorise expenses
• Evidence that digital links are maintained between systems

Having well-organised digital records makes compliance checks straightforward. Having poor or incomplete records makes them stressful and potentially expensive.

HMRC's penalty framework includes specific penalties for failure to keep adequate records — up to £3,000 per tax year. These penalties are separate from late submission or late payment penalties.

The Bottom Line

Digital record-keeping under MTD is not fundamentally different from good bookkeeping practice. The main change is that it must be digital and maintained in MTD-compatible software. If you're already using cloud accounting software with bank feeds, you're probably already compliant.

If you're still using paper records or basic spreadsheets, the transition requires some effort — but it's also an opportunity to upgrade your financial management. Better records lead to better tax claims, fewer missed deductions, and a clearer picture of your business performance.

Sign up for Accounted and let Penny set up your digital record-keeping system. From automatic bank feeds to AI-powered categorisation to receipt capture via WhatsApp, every feature is designed to make HMRC-compliant record-keeping as effortless as possible.

For the complete picture on Making Tax Digital, start with our self-assessment guide or our Making Tax Digital complete guide.

Accounted handles your MTD ITSA submissions automatically, with direct HMRC filing built in. See how MTD works in Accounted →