Making Tax Digital has been on the horizon for a while now. And if you’ve been vaguely aware of it without quite getting to grips with the detail, you’re not alone. Most business owners know it means something about going digital, using software, and filing things differently — but the specifics of what HMRC actually requires in your day-to-day record-keeping often get lost in the noise.
This article cuts through that and explains, in plain terms, what digital records really means under MTD, what counts and what doesn’t, and what changes in practice for a small business keeping its books properly.
Why MTD Exists — and Who It Currently Applies To
HMRC’s reasoning behind Making Tax Digital is essentially that digital records are more accurate than paper ones, reduce errors, and make tax collection more efficient. Whether or not you agree with their approach, the rules are coming regardless.
Here’s where things stand right now:
MTD for VAT has been mandatory since April 2022 for all VAT-registered businesses. If you’re VAT-registered, you are already required to keep digital records and submit VAT returns using HMRC-compatible software.
MTD for Income Tax Self Assessment (MTD for ITSA) is being phased in from April 2026, starting with self-employed people and landlords with income above £50,000. Those earning above £30,000 follow from April 2027. The dates have shifted before, but HMRC has been clear that this expansion is happening.
Our post on MTD for Income Tax covers the full timeline, and our overview of MTD timelines and quarterly updates explains what the quarterly reporting obligation actually involves once you’re in the system.
What “Digital Records” Actually Means
This is where most of the confusion sits. Many business owners assume “going digital” means scanning their receipts or keeping their spreadsheet on a cloud drive rather than a desktop. That’s not quite what HMRC means.
Under MTD, a digital record must capture specific data points — not just store a copy of a document. For VAT purposes, each transaction record must include:
- The time of supply (the date of the transaction)
- The value of the supply
- The rate of VAT charged (standard, reduced, or zero)
- The total VAT amount
For MTD for Income Tax, your records must capture income and expenses in a way that allows you to produce quarterly summaries and a final declaration at year end.
The key point is this: a photo of a receipt sitting in a folder on your phone is not a digital record under MTD. A scanned invoice saved in Dropbox is not a digital record under MTD. The data from that transaction needs to be captured in compatible software — not just the image of the paper itself.
What Are Digital Links — and Why They Matter?
There’s another requirement that trips businesses up: digital links. HMRC requires that data flows digitally from where it’s recorded all the way through to the VAT or tax return. You can’t break that chain by typing figures manually from one system to another.
In practice, this means:
- Copying and pasting figures from a spreadsheet into your submission software breaks the digital link
- Manually re-entering transaction data from one system into another breaks the digital link
- Using software that connects directly to your accounting records and pulls the data automatically maintains it
This is why spreadsheets alone — even sophisticated ones — don’t satisfy MTD for VAT unless they’re connected to HMRC-compatible bridging software that submits the return directly. Our article on bridging software vs cloud accounting explains this distinction in detail and is worth reading if you’re currently using a spreadsheet-based system.
Cloud accounting software like QuickBooks handles this automatically. Your transactions are recorded in the system, the VAT calculations are done within the same system, and the return is submitted directly from it — the digital link is unbroken throughout.
What Digital Record-Keeping Actually Looks Like Day to Day
Let’s make this concrete. Here’s what MTD-compliant bookkeeping looks like in practice for a typical small business.
Recording sales. Every time you issue an invoice or make a sale, it goes into your accounting software directly — either by raising the invoice in the software itself or by importing it. If you use a point-of-sale system or invoicing tool, many of these can integrate directly with cloud accounting platforms.
Recording purchases. When you receive a supplier invoice, you log it in the software with the date, supplier, amount, and VAT rate. Many platforms now let you photograph a receipt with your phone and use OCR to extract the data automatically — the key is that the data ends up in the software, not just the image.
Bank reconciliation. With a bank feed connected, your transactions come in automatically each day. You match them to the invoices and expenses already recorded. This is where bank feeds earn their keep — our earlier article on business bookkeeping services goes into the detail of how this works and why it reduces errors so significantly.
VAT calculations. The software does these for you in the background based on the VAT rates you’ve assigned to each transaction. When your VAT period ends, the return is ready to review and submit with a few clicks. A good vat return accountant will review the return before it goes in and catch anything that doesn’t look right.
Quarterly summaries (under MTD for ITSA). Once you’re within the income tax version of MTD, you’ll need to submit a summary of your income and expenses to HMRC every quarter. This is in addition to your annual return. The quarterly submissions don’t replace your tax return services — they sit alongside them and feed into the final year-end declaration.
Common Misconceptions About MTD
“I already file online, so I’m compliant.” Filing online isn’t the same as MTD compliance. MTD specifically requires digital record-keeping in compatible software and submission through that software — using HMRC’s older online portal doesn’t satisfy the requirement.
“I use a spreadsheet, so I’m fine.” Spreadsheets can form part of an MTD-compliant system, but only if they’re connected to bridging software that maintains the digital link. A spreadsheet on its own — even a very detailed one — doesn’t meet the standard.
“MTD for VAT doesn’t apply to me because I’m below the threshold.” From April 2022, MTD for VAT applies to all VAT-registered businesses, regardless of turnover. There is no minimum threshold anymore. If you’re VAT-registered, you need to be compliant.
“My accountant files for me, so it’s sorted.” Your accountant may well submit your returns, but the record-keeping obligation sits with you. You need to be keeping your records in a compatible way — not just handing over a pile of bank statements once a quarter.
Our post on 10 common MTD pitfalls goes through the mistakes businesses make most often and how to avoid them.
Choosing the Right Software
HMRC maintains a list of compatible MTD software. The most widely used options in the UK are QuickBooks, Xero, FreeAgent, and Sage. Each has its strengths, and the right one depends on the size of your business, how you invoice, and what other tools you’re already using.
Our MTD software shortlist for small businesses covers the main options in plain terms.
At Asmat & Co, we work with QuickBooks as our primary platform. As QuickBooks accountants Reading and Slough clients know, we set everything up correctly from the start — bank feeds, VAT rates, expense categories — so the day-to-day recording is as easy as possible.
How Good Bookkeeping Feeds Into the Bigger Picture
MTD-compliant bookkeeping isn’t just about satisfying HMRC. When your records are kept properly throughout the year, everything downstream becomes easier and more accurate.
Your quarterly financial reports — profit and loss, cash flow, balance sheet — are generated automatically from the same data you’re keeping for MTD. Rather than a year-end scramble, you have a live view of how your business is performing.
For limited company directors, clean digital records mean your company accounts accountant can prepare your statutory accounts and corporation tax return far more efficiently, with less back and forth.
For sole traders, it means your Self Assessment figures are ready to go — and any refunds or reliefs you’re entitled to can be identified properly rather than being missed in a last-minute rush.
If you’ve let things slip and your records aren’t where they should be, don’t panic — our guide on what to do if your bookkeeping is behind walks through how to get back on track without it becoming a bigger problem.
FAQs
Do I need to keep paper records as well as digital ones under MTD? No. HMRC accepts digital records as your primary record. You don’t need to print and file paper copies alongside them. That said, you should keep original documents (invoices, receipts) for a minimum of six years in case of enquiry.
What happens if I make a mistake in my digital records? Corrections can be made within the software. The process depends on whether you’ve already submitted the affected period — if you have, our post on amending returns explains the process. The important thing is not to delete records; corrections should be made as adjustments.
Can I use more than one piece of software? Yes, but you need to ensure there’s a digital link between them. For example, if you use one system for invoicing and another for your accounts, they need to be integrated — not connected by manually typing figures from one into the other.
What is a digital link exactly? A digital link is any electronic transfer of data between systems without manual re-entry. This includes automated data imports, API connections, and software integrations. Copy-and-paste is not considered a digital link by HMRC.
I’m a self employed accountant — does MTD apply to my own business records? Yes. If you earn above the relevant income threshold, MTD for Income Tax will apply to your own records in exactly the same way as any other self-employed person.
How far back do I need to keep digital records? HMRC requires you to keep records for at least five years after the January 2026 filing deadline for the 2024/25 tax year (for MTD ITSA) or six years for VAT records. Your software will store them automatically — you just need to make sure you don’t delete old data.
Get Your Bookkeeping MTD-Ready — Without the Stress
If you’re not sure whether your current system is compliant, or if you know it isn’t and you’re putting off dealing with it, now is a good time to sort it.
Whether you’re a self employed accountant managing your own records or a small business looking for a proper system to be put in place, we can help. We set up cloud bookkeeping from scratch, migrate existing records across, and make sure your digital links and VAT settings are correct before you need them to be.
As small business accountants Reading and Slough, we’re well placed to support businesses across the South East and beyond. And as a Slough accountant practice with nearly two decades of experience, we’ve seen every type of bookkeeping situation — nothing will surprise us.
