Digital Record Keeping for MTD

Good record keeping has always been at the heart of good business, but under Making Tax Digital for Income Tax (MTD for IT), it becomes a legal requirement. Individuals within the scope of MTD for IT will need to maintain digital records of their income and expenses using compatible software, submit information electronically to HMRC, and ensure their systems meet the new digital standards. While this may sound like a significant change, the right software and processes can make managing your finances more efficient, accurate and far less time-consuming.

Digital record keeping 

It is a legal requirement that all individuals within the scope of MTD for IT must keep digital records of their income and expenses, using software that is compatible with MTD for IT. It will be possible to maintain spreadsheet records, but this will require ‘bridging’ software to make the submissions.

Digital records 

Cloud Accounting Software is digital and will meet the requirements of MTD for VAT.

Handwritten cashbooks and ledgers are not digital.

Spreadsheets and desktop software are not digital on their own, but in association with bridging software, will meet the digital requirement.

Quarterly information required 

Businesses must keep digital records of the amount, category and date of income and expenses relating to their sole trade and / or property business.

Where business or property income is below the VAT threshold, ‘three-line accounts’ will be permitted to report total income, expenses and profit or loss, without having to allocate these to specific categories. The exception to this is finance costs for landlords which will need to be categorised separately.

Digital links

If accounting records are maintained in more than one program, there must be digital links between each piece of software.

Digital links include:

• Emailing a spreadsheet containing digital records to a tax agent so that the agent can import the data into their software to carry out a calculation
• Transferring a set of digital records onto a portable device, for example,a memory stick, and physically giving this to an agent to import that data into their software
• XML, CSV import and export, and download and upload of files
• Automated data transfer
• Linked cells within or between spreadsheets – the transfer of information by the use of copy and paste or cut and paste does not meet the requirement for a digital link.

We are still awaiting further guidance from HMRC on digital links.

Business bank accounts 

With MTD for IT coming, now is the time to separate out your business banking from your personal banking if you currently have a single bank account, or you put multiple personal transactions through your business bank account.

Cloud Accounting Software has bank feeds under the Open Banking initiative which will help simplify the creation of digital records, so having the relevant business data separate from your personal banking will make life easier in the future.

There is a further advantage to having separate bank accounts for your business and you personally. In the event that your tax affairs are subject to enquiry by HMRC, it is only the business bank account transactions which you might have to disclose to HMRC, with your personal banking transactions remaining private and undisclosed in the HMRC enquiry.

Software choices 

The following alternative software solutions may be considered:

• API-enabled software
• API-enabled software and accounting software
• A single spreadsheet and bridging software
• Multiple spreadsheets and bridging software
• Accounting software, a spreadsheet and bridging software.

We currently support clients using Cloud Accounting Software, which is fully compliant with the digital record-keeping requirements of MTD for VAT and MTD for IT, and includes bridging software through which the quarterly returns will be submitted direct to HMRC. We shall be able to enable clients for MTD for IT from within this software.

A full list of MTD compatible software providers may be found under the following link: https://www.gov.uk/guidance/find-softwarethats-compatible-with-making-tax-digital-forincome-tax.

Advantages of using Cloud Accounting Software

Cloud Accounting Software has significant advantages over the traditional ways of bookkeeping.

It allows you to:

• See a clear picture of your current financial position in real-time
• Have your accounts 100% online, so there is no software to install, and everything is backed up automatically. Updates are free and instantly available
• Avoid upfront accounting software costs – upgrades, maintenance, system administration costs and server failures will no longer be an issue
• Have your bank feed your data directly into your accounts on a daily basis
• Take a photo on your phone of a purchase invoice to post it immediately
• See your results, who owes you money, who you owe to and your business bank balance 24/7, 365 days of the year, from your phone.

Most importantly, Cloud Accounting Software will be fully compliant with HMRC and MTD for IT.

Registering for MTD for IT 

Individuals will have to register for MTD for IT, as HMRC will not automatically register you. This can be done through your Government Gateway account. If you do not already have one you will have to sign up for one.

You cannot register for MTD for IT until you are already using MTD compatible software.

Tax agents and accountants will be able to register on behalf of clients. We will, of course, be happy to do this for you should you wish.

We are here to help

For those of you who will be mandated in April 2027 or 2928, now is  a good time to consider whether you are happy to undertake the reporting yourself, or whether you wish to include this in the services that we provide to you. If you have any queries or concerns, please do contact us.

You can also download are full, free guide here: MTD for IT