Digital records for MTD: what each record must contain

Making Tax Digital for Income Tax requires sole traders and landlords to keep their business records digitally and send quarterly updates built from them. HMRC defines a digital record as a record of your income or expense that is created and stored using software that works with Making Tax Digital for Income Tax.

That can be bookkeeping software, or a spreadsheet used with bridging software that sends your updates. What matters is that each transaction is recorded with the details HMRC asks for, and that figures move between products by a digital link rather than being retyped.

HMRC says each digital record needs three things. Each one is needed to build the totals in a quarterly update.

A note of what the money was for, or who paid you, is not on HMRC’s list. It is still worth adding, because it makes the record easy to check and lets you answer a question about it years later.

• The amount of the income or expense.
• The date of the transaction.
• A category. Making Tax Digital uses the same categories of income and expenses as Self Assessment.

The difference between a weak record and a good one is usually a missing category or a missing date. The examples below are fictional.

Each better record could be totalled into an update without guessing. The short note on the end is optional, but it saves time when you check your figures.

For self-employment, HMRC says to record your sales, takings and fees. Retailers can choose to record their daily gross takings instead of each individual sale.

For property, record rent, lease premiums, reverse premiums and inducements. If a letting agent only tells you the amount left after their fees, HMRC says to ask what the full amount of income was before expenses were deducted. You then record the gross income and the expenses separately.

Each expense needs its own record with the amount, the date and the category. Where a cost is partly private or partly not allowable, HMRC gives you three ways to record it: record only the allowable part, record the total and the disallowable part, or record the total and then adjust the category total later.

Some payments mix capital and revenue, such as a mortgage payment that is partly interest and partly repayment. HMRC says to record either the interest or the full amount, and adjust before you finalise the year if you record the full amount.

If you are sure you will use a simplified expenses scheme, such as flat-rate mileage, you do not need digital records of your actual costs for it. If you are not sure, record everything.

HMRC expects one set of digital records for each sole-trade business. Its example is someone who is an electrician as well as a driving instructor, who keeps one set of records for each and sends a quarterly update for each.

All your UK properties form one UK property business, including your share of any jointly let properties. For jointly let property you only record your share. HMRC lets you record one entry per income category for each update period, and one entry per expense category for the year. Foreign property needs a record for each property, combined into one foreign property business.

If a business has turnover under £90,000, HMRC allows simpler categorisation. A sole trader then only needs to record whether each transaction is income or an expense, and the update sends total income and total expenses. The test is per income source.

Residential landlords with UK property turnover under £90,000 can use it too, but must still record whether an expense is a restricted finance cost, such as mortgage interest. If you are unsure whether your turnover will reach £90,000, HMRC says to categorise your records in full.

Here is a fictional landlord with one flat let through an agent. Each month the agent pays them £880, which is £1,000 of rent less a £120 fee. Over the first update period they make three months of records.

They record the gross rent and the fee separately each month. They also pay £300 of mortgage interest a month, which they record on its own as a residential finance cost. HMRC gives relief for that as a basic rate tax reduction, not as an expense, so it is not in the profit below.

HMRC says you should create digital records as close to the date of the transaction as possible, and in any case before the update deadline for that period, or before you send the update if that is earlier. Records start from 6 April, or from 1 April if you use calendar update periods.

You still need to keep original records or supporting documents, or copies of them, such as bank statements and invoices. HMRC says to keep your digital records for at least 5 years after the 31 January submission deadline for the tax year. If you keep simple books in SimpleTaxFlow, recording income and expenses is free.

Tax rules can change and your circumstances matter. Use HMRC’s current guidance to confirm what applies to you.