MTD requires you to keep "digital records" of your income and expenses. The term sounds more technical than it is. In practice, a digital record is just a line in your software that has the core details of a transaction.
What you actually have to record
For every sale and every business expense you want to claim, you need to capture:
- Date the transaction happened.
- Amount, in pounds and pence.
- Whether it's income or an expense (and, for landlords, which category, see below).
- A short description (who/what it was for).
That's it. HMRC's rules don't force you to enter line-by-line detail from a long invoice, one total per transaction is enough.
What you don't have to do
What counts as a digital record
A transaction line in MTD-recognised software. That can come from:
- Typing it in manually.
- A bank feed importing it from your bank.
- A receipt-capture app reading it from a photo.
- A CSV import from another system.
Spreadsheets can work, but only if they're linked to HMRC via bridging software, otherwise they don't count as digital records for MTD purposes.
Under £90k turnover
If a business's turnover is under £90,000 for the tax year, you only need to record whether something is income or an expense. You do not have to categorise your expenses any further. This is called consolidated expenses: you report one total figure for expenses in your quarterly update, and one total for income. It works the same for sole traders and UK landlords, with one difference for landlords (see Landlord rules).
Each business is judged on its own. If you're a sole trader and a landlord, each needs to be under £90,000 to use one total.
This keeps things very simple:
- Income from selling widgets: one line.
- Bought a laptop: one line, expense.
- Paid for stationery: one line, expense.
(You can still categorise if you want to, the £90k rule just means you're not required to.)
Over £90k turnover
Once a business's turnover reaches £90,000 in the tax year, every record for that business from 6 April needs a category before you can send your next quarterly update. You keep categorising the following tax year too. For a sole trader, HMRC wants to see, for example:
- Cost of goods sold
- Staff costs and wages
- Premises running costs
- Motor, van and travel
- Repairs and maintenance
- Advertising and marketing
- Professional fees
- Administrative costs
- Finance charges and interest
- Depreciation
- Other
Good software handles this for you, you categorise transactions as you go, and the software maps categories to HMRC's required codes at submission time.
Landlord rules
The same £90,000 rule applies to UK property, counting all your property income before expenses. Under it, you can send one expenses total, but if you let residential property you still need to record which expenses are residential finance costs (like mortgage interest) and send them on their own. HMRC treats them differently, as a tax reduction rather than an expense.
Once your property income reaches £90,000, categorise every expense into:
- Premises running costs (insurance, ground rent, utilities if you pay them, etc.)
- Repairs and maintenance
- Finance costs (mortgage interest, note the tax treatment is different for residential and non-residential; see For landlords)
- Professional fees (letting agent, legal, accountancy)
- Cost of services (cleaning, gardening)
- Travel
- Other
Good landlord-focused software does it for you based on the category you pick when you reconcile a transaction.
What if I forget to record something?
No panic. MTD quarterly updates are cumulative, each update includes everything from the start of the tax year, not just the last three months. If you miss a transaction in Q1 and add it in Q3, your Q3 update will automatically include it and correct the earlier figure. See Fixing mistakes.
A few good habits
- Reconcile regularly. A 20-minute Sunday evening session once a week beats a panicked three hours before each quarterly update. Bank feeds make this fast.
- Photograph receipts on the spot. Most software has a mobile app , snap it when it's in your hand, not in a wallet weeks later.
- Separate business and personal. A dedicated bank account (or even just a clearly flagged second card) cuts reconciliation time in half. Not legally required, but strongly recommended.
- Categorise if you might pass £90k. If you're well under £90k, one total is fine. If you might reach it, categorise as you go: once you pass it, every expense since 6 April needs a category.
What about VAT?
MTD for VAT and MTD for Income Tax are separate schemes, though they share a philosophy. If you're registered for VAT, you're already using MTD for VAT. The two don't duplicate, VAT amounts on a sale aren't income for income tax, so your software handles them correctly as long as you set up VAT properly. If in doubt, ask your accountant.
Summary
Records have to be digital, but they're not complicated. Four fields per transaction; originals stored somewhere; categorise once a business passes £90k, and landlords keep residential finance costs apart. Software does the heavy lifting.