Digital Record-Keeping Requirements for UK Businesses

Digital record-keeping under Making Tax Digital has specific requirements that go beyond simply typing numbers into a computer. HMRC has defined what constitutes compliant digital records, and understanding these requirements properly helps you avoid both under-compliance and the trap of overcomplicating things.

The fundamental requirement is that your business records must be maintained digitally using MTD-compatible software. This means software that can store your records, calculate your tax position, and submit quarterly updates to HMRC via their API. Spreadsheets alone do not meet the requirement unless they are linked to bridging software that handles the HMRC submission — and even then, the setup must meet specific technical criteria.

What records must be digital? For income, you need to record the date, amount, and category of each income transaction. For expenses, you need the date, amount, and category. The categories align with the boxes on the Self Assessment return — sales income, other income, cost of goods sold, travel, office costs, and so on. HMRC does not require you to digitise every receipt — but you must retain receipts for five years and be able to produce them if asked.

The digital linking requirement is important and often misunderstood. If you use more than one piece of software in your record-keeping process — for example, recording transactions in one tool and summarising them in another — the data must flow between them digitally. You cannot manually re-type numbers from one system into another. This is the "digital link" requirement, and it applies to any step in the process from initial recording to final submission.

For most sole traders, the simplest approach is to use a single MTD-compatible application for everything. Tools like Accounted handle recording, categorisation, calculation, and submission in one place, which means the digital linking requirement is automatically satisfied.

What about historical records? HMRC does not require you to digitise all your historical records retroactively. The MTD requirement applies from your mandatory start date — 6 April 2026 for those above £50,000. Records from before that date can remain in whatever format they are currently in. However, you will need opening balances in your MTD software, so some historical data will need to be entered.

Correction of errors has specific requirements. If you discover an error in a previous quarterly submission, you correct it in the next quarterly update or in your final declaration, depending on the nature and timing of the error. Your software should handle this — you record the correction as a normal transaction, and it flows through to the next submission. What you cannot do is go back and amend a previously submitted quarterly update.

Record retention is five years from the 31 January deadline for the relevant tax year. This is unchanged from the existing Self Assessment requirement. Your digital records must be retained for this period, which means you need to consider what happens if you change software. Can you export your records? Will the old software still be accessible? Plan for data longevity, not just current compliance.

What HMRC does not require: you do not need to digitise every paper receipt. You do not need to use optical character recognition or automated data extraction. You do not need cloud storage specifically. You do not need to categorise transactions using a specific taxonomy beyond the standard categories. The requirements are less onerous than many people fear — they are designed to ensure that basic financial records are maintained in a structured, submittable digital format, not to impose a particular way of running your business.

The practical advice is: choose MTD-compatible software, record your transactions as they happen, categorise them correctly, and submit your quarterly updates on time. Retain your underlying records — digital and paper — for five years. That is the entirety of the compliance requirement. Everything beyond that is good practice rather than legal obligation.