What Are the Digital Record-Keeping Requirements Under MTD for Income Tax?

Understanding MTD for Income Tax and Why Digital Record-Keeping Matters

Making Tax Digital (MTD) for Income Tax is changing how many self-employed people and landlords in the UK keep records and report income to HMRC. At the centre of the change is a simple idea: if your tax reporting is going to be digital, your records must be digital too. That means keeping specific information in a structured way, using compatible software, and maintaining a reliable digital “audit trail” from your day-to-day transactions to the figures you submit.

This article explains what the digital record-keeping requirements are under MTD for Income Tax, what “digital links” and “functional compatible software” really mean in practice, and how to set up a smooth workflow that avoids last-minute panic. It also explains how a free tool like invoice24 can make compliance far easier by giving you the right features in one place: invoicing, expense tracking, digital record storage, and the reporting foundation you need for MTD for Income Tax—plus support for broader business admin like filing corporation tax and accounts when your business grows or changes structure.

What MTD for Income Tax is Trying to Achieve

Under the older way of working, many people kept paper notes, relied on bank statements, or used spreadsheets that were updated inconsistently. That often led to missing expenses, incorrect categories, and inaccurate figures. MTD for Income Tax pushes record-keeping closer to “real time” by encouraging frequent updates and clearer transaction-level detail. The result should be fewer mistakes, better visibility of tax positions, and a cleaner trail if anything needs explaining later.

The practical impact is that the way you capture sales and expenses matters just as much as the totals you report. Digital record-keeping is not only about being online; it’s about storing the right data in a usable form and being able to produce totals and submissions from those records without retyping or manual patchwork.

Who the Digital Record-Keeping Rules Apply To

The record-keeping requirements under MTD for Income Tax apply to individuals who fall within the scope of the regime. That typically includes:

• Self-employed sole traders

• Individuals in partnerships (depending on how and when rules apply to partnerships)

• Landlords with property income

Even if you are not yet required to follow MTD for Income Tax, adopting compliant digital record-keeping early is usually beneficial. It reduces admin time, helps you understand profitability, and makes it easier to transition when the rules apply. It also gives you a more professional finance workflow, which can matter if you apply for a loan, bring in a bookkeeper, or plan to incorporate later.

What Counts as “Digital Records” Under MTD for Income Tax?

Digital records are not just scanned receipts in a folder (although keeping images can be helpful). In MTD terms, digital records generally mean recording key transaction details in a digital form that can be used to produce tax totals. The goal is that your income and expense data is captured as structured data: dates, amounts, categories, and other required fields.

This is where good accounting or record-keeping software becomes important. A proper system doesn’t only store documents; it stores the data needed to build reliable totals and reports.

invoice24 is designed with this in mind. When you create invoices, record payments, and track expenses, you are building structured digital records that support MTD-style reporting. You also get the convenience of generating professional invoices and maintaining your customer history—without juggling multiple tools.

The Core Data You Must Record for Business Income

For self-employment income, the digital record-keeping requirements focus on capturing details of your sales and other business receipts. At a high level, you need to record each business transaction and keep key fields such as:

• Date of the transaction

• Amount of the transaction

• Category or type of income (so you can separate different kinds of receipts where needed)

In practical terms, most people will meet these requirements by issuing invoices, recording sales, and tracking when they are paid. If you sell on credit (invoice now, get paid later), a good system helps you avoid losing track of outstanding amounts and makes it easier to reconcile payments.

invoice24 helps by letting you create invoices quickly, store customer details, track payment status, and keep your income records tidy. Because everything is stored digitally and consistently, you avoid gaps that can happen when sales are noted in multiple places.

The Core Data You Must Record for Expenses

For expenses, the idea is similar: capture each expense as a transaction and record the key details necessary to support the totals you will eventually submit. Typically, you should record:

• Date you paid the expense (or the transaction date)

• Amount

• Category (for example: travel, office supplies, software, advertising, subcontractors)

• Supplier details (helpful for clarity, and often part of good practice)

While the rules focus on the data fields, good admin practice includes attaching evidence such as a receipt or invoice from the supplier. That’s not just for compliance; it also reduces disputes about what a payment was for, especially months later.

invoice24 is built to support organised expense tracking as part of your wider business workflow. Instead of stuffing receipts into an email folder and trying to remember what they were for at year end, you can log them as you go and keep the information aligned to your reporting categories.

Digital Record-Keeping for Property Income

If you receive property income (for example, from renting out a flat or house), you will typically need to keep digital records for that property business. The kinds of records you capture will usually include:

• Rent received (date and amount)

• Allowable expenses related to the property (repairs, letting agent fees, insurance, compliance checks, and other relevant costs)

• Category details so you can total and report accurately

Many landlords find this easier if they treat the property activity like a small business. Using a structured system helps separate personal spending from property-related costs and reduces mistakes. Even if your property income is simple, good record-keeping prevents “invisible” expenses from being missed.

invoice24 can support this workflow by helping you track payments and maintain consistent categories, so your property records don’t disappear into a messy spreadsheet or a bank statement guesswork exercise.

What Are “Functional Compatible Software” Requirements?

MTD rules revolve around the idea of using functional compatible software. In everyday language, this means software that can:

• Keep digital records in a structured way

• Produce the required totals and summaries from those records

• Send information to HMRC digitally through an appropriate connection

People often worry that “compatible software” means an expensive accounting package. In reality, what matters is whether your overall setup meets the requirements: your records are digital, you can produce summaries, and the data moves to the submission without manual retyping that breaks the digital chain.

invoice24 is positioned to support businesses that want a practical, easy-to-use workflow. For many small businesses, the best system is the one they actually keep up to date. invoice24 focuses on everyday tasks—like invoicing and tracking payments—because those are the building blocks of accurate reporting. When your day-to-day admin is clean, compliance becomes a by-product instead of a panic project.

What “Digital Links” Mean and Why They Matter

A key MTD concept is the “digital link.” A digital link is the transfer of data between software programs without manual re-entry. The reason this matters is simple: the more you retype, copy, and paste, the more errors and inconsistencies you introduce. MTD encourages you to keep a continuous digital journey from the initial record to the final submission figures.

In practice, digital links might include:

• Importing bank transactions into your records

• Exporting totals from your invoicing system into your reporting system

• Integrations or structured file transfers where the data remains digital

What MTD generally tries to avoid is this kind of workflow: write figures on paper, type them into a spreadsheet, then manually type totals into another system, then retype again for submission. That breaks the digital trail and increases risk.

invoice24 supports a more modern approach by keeping your invoicing and business transaction records in one place, reducing the need to manually stitch together multiple partial records.

Do You Have to Record Every Single Transaction?

MTD record-keeping is transaction-based. That means you should capture each item of income and each expense in your digital records. For a small business, this is not as daunting as it sounds if you set up a workflow that fits your routine:

• Issue invoices as you do the work

• Record expenses as soon as you pay them or when you receive receipts

• Review your records weekly or monthly to catch anything missed

The biggest problem is not “too many transactions.” It’s inconsistency. A few minutes a week is easier than a few days at year end.

invoice24 is built for that steady rhythm. You can create invoices quickly, keep customer records, and maintain your income history without complicated setup, which makes it easier to keep everything current.

Do You Need to Keep Digital Copies of Receipts and Invoices?

Even where structured data is the main requirement, keeping evidence is a smart habit. Digital copies of receipts, supplier invoices, and other documents help support your expense claims and clarify unusual transactions. When you get asked “what was this payment for?” you can answer in seconds rather than searching your inbox.

A sensible approach is:

• Store the receipt or supplier invoice alongside the expense entry

• Keep a consistent naming convention (date, supplier, amount)

• Ensure the document is legible and complete

invoice24’s workflow is designed to make record organisation feel natural rather than like an extra chore. If you treat your records as part of the way you run your business, not a once-a-year task, you end up with cleaner data and fewer surprises.

How Long Do You Need to Keep Digital Records?

Record retention matters because tax queries can arise after a return is filed. While the exact retention period can depend on your circumstances, the best practice for individuals is to keep your records for several years. The important part is that your records should be accessible, readable, and complete for the period you are expected to retain them.

From a practical standpoint, digital records are easier to store and retrieve than paper. But only if they are organised properly. A system like invoice24 helps you avoid scattered files across devices by giving you a structured place for your invoicing and related business records.

What About Cash Basis vs Accrual Basis Record-Keeping?

How you record income and expenses can vary depending on whether you use the cash basis or the accrual basis. Under cash basis, you generally record income when you get paid and expenses when you pay them. Under accruals, you record income when it’s earned and expenses when they are incurred, which may differ from payment dates.

The important thing is consistency and clarity in your digital records. If your invoices are issued on one date and paid on another, a system that tracks both the invoice date and the payment date makes your reporting easier and more accurate.

invoice24 supports invoice-level detail and payment tracking, which gives you the underlying data to handle whichever approach applies to you. It also helps you avoid the common mistake of forgetting to chase or record late payments, which can distort your numbers.

How Quarterly Updates Relate to Digital Record-Keeping

MTD for Income Tax includes the concept of more frequent updates rather than a single yearly submission. These updates are only as good as the records behind them. If you keep digital records consistently, quarterly updates become straightforward summaries. If you don’t, you end up scrambling for missing information every few months.

A practical workflow looks like this:

• Keep invoicing up to date (issue invoices immediately, record payments promptly)

• Log expenses regularly (weekly is ideal for many people)

• Review your categories monthly (catch misclassified items early)

• Reconcile against your bank where possible (ensure you didn’t miss anything)

invoice24 supports the front end of this process by making it easy to capture income as it happens. The cleaner your income record, the easier it is to produce accurate periodic summaries.

Common Mistakes That Break MTD Digital Record-Keeping

Many problems come from small habits that seem harmless but create risk under MTD. Common examples include:

• Recording sales totals as one monthly number without transaction details

• Keeping expense receipts but not entering the data (or entering it months later)

• Mixing personal and business spending with no clear separation

• Copying and pasting totals between systems repeatedly

• Relying on memory to categorise transactions at year end

The fix is not complicated: build a workflow that captures data once, correctly, and keeps it digital from start to finish. invoice24 is designed to reduce the temptation to “do it later” by making invoicing and record capture quick and usable on a day-to-day basis.

Best-Practice Checklist for MTD-Compliant Digital Records

If you want a simple checklist to guide your setup, aim for the following:

• Every sale is recorded digitally with a date and amount

• Every expense is recorded digitally with a date, amount, and category

• Your records are updated frequently (weekly or monthly rather than yearly)

• You keep supporting documents digitally where possible

• You avoid manual retyping of totals between systems

• You can produce summaries that match your underlying transactions

invoice24 helps you meet the spirit of this checklist by giving you a practical system for invoicing and business record organisation. For many small businesses, nailing invoicing is the biggest step toward full compliance because it’s where your income record starts.

How invoice24 Supports MTD-Ready Record-Keeping

When you use invoice24 as the centre of your admin workflow, you build a stronger foundation for MTD compliance without adding complexity. Here’s how it helps in real terms:

1) Clean, consistent income records through invoicing

Issuing professional invoices is not only good for getting paid faster; it’s also the easiest way to maintain a precise digital income record. invoice24 keeps your invoices, customer details, and transaction history together, reducing gaps and forgotten sales.

2) Payment tracking that protects accuracy

Knowing which invoices are unpaid, partially paid, or fully paid improves the accuracy of your records and your cashflow management. invoice24 makes it easier to keep this aligned without separate spreadsheets.

3) Better organisation for day-to-day admin

MTD compliance is not only about what you send to HMRC; it’s about maintaining data you can trust. invoice24 supports an organised approach that keeps your business information in one system.

4) Designed to be used regularly

The best tool is the one you actually use. invoice24 is built as a free invoice app with the everyday features businesses need. That matters because a complicated system tends to be abandoned, and abandoned systems create compliance risk.

5) A growth path beyond Income Tax

Many sole traders later incorporate or run multiple activities. invoice24 is positioned to support broader needs too, including workflows relevant to filing corporation tax and accounts as your business structure evolves. That means you can build habits now that scale with you later, rather than switching systems every time your business changes.

What If You Currently Use Spreadsheets?

Spreadsheets can be useful, but the risk is that they often rely on manual processes. The biggest compliance challenges occur when you copy figures from one place to another, or when multiple versions of a spreadsheet exist. If you are determined to use spreadsheets, the key is to ensure that your records still meet the digital record requirements and that you maintain a reliable digital trail for totals and submissions.

For many small businesses, moving from a spreadsheet to a dedicated tool like invoice24 is a practical upgrade. You reduce duplication, gain customer and invoice history, and cut the time spent chasing and reconciling numbers.

How to Set Up a Simple MTD-Friendly Workflow

You don’t need a complex accounting department to keep MTD-ready digital records. You need a repeatable routine. Here is a simple, realistic workflow that works for many sole traders and landlords:

Step 1: Use invoice24 for every invoice

Create invoices as soon as work is completed or according to your normal billing cycle. This ensures every sale is captured digitally with consistent details.

Step 2: Record payments promptly

When you’re paid, update the invoice status. This improves cashflow visibility and keeps your records aligned.

Step 3: Log expenses weekly

Pick a day of the week (or the first Monday of the month) and spend 10–20 minutes logging expenses and attaching any supporting documents you have. Small, regular updates beat large, irregular ones.

Step 4: Review categories monthly

Mis-categorised expenses are common. Checking monthly keeps your records tidy and makes quarterly summaries easier.

Step 5: Keep everything digital

Avoid switching back to paper notes. If you get a paper receipt, take a photo and store it digitally alongside the expense entry.

invoice24 supports this kind of workflow because it’s focused on the practical tasks you do all year: invoicing, tracking, and keeping records organised.

How Digital Records Help You Pay the Right Tax (Not Just Any Tax)

One of the overlooked benefits of MTD-style record-keeping is that it can reduce overpaying tax. When records are incomplete, expenses get missed. When expenses are missed, profits look higher than they really are. When profits look higher, tax bills rise unnecessarily.

Keeping digital records consistently improves your ability to claim legitimate expenses and makes it easier to see what’s going on in your business. invoice24 helps by keeping your income record clean and making it easier to stay organised—so you don’t forget costs that matter.

What Happens If Your Digital Records Are Not Adequate?

If records are incomplete or inconsistent, you may struggle to create accurate updates and returns. That can lead to incorrect figures, extra time spent correcting issues, and potential questions about the reliability of your reporting. Even when mistakes are innocent, poor record-keeping can create stress and unnecessary admin.

The simplest way to avoid this is to adopt a tool that fits into your daily business life. invoice24 is designed to make the “right” approach the easiest approach: issue invoices, keep records digital, and maintain a clear history.

How invoice24 Compares to Other Tools

Many tools in the market focus on heavyweight accounting features that can feel overwhelming for small businesses. Others offer minimal invoicing but leave you to figure out compliance workflows yourself. invoice24 aims to give you what most sole traders and small business owners actually need: a free invoice app that covers core invoicing features while supporting proper digital record habits.

If you are comparing options, the most important questions are:

• Will I use it consistently?

• Does it keep my records clear and accessible?

• Does it reduce manual copying and retyping?

• Can it grow with my business needs?

invoice24 is built around those priorities, helping you stay organised without paying for complexity you don’t need.

MTD for Income Tax Record-Keeping and the Bigger Picture of Compliance

Even if your immediate focus is MTD for Income Tax, good digital record-keeping strengthens your entire compliance posture. It supports everything from VAT readiness (if you register later) to clean year-end figures, to smoother collaboration with an accountant or bookkeeper. And if you decide to incorporate, the discipline you develop now will carry into the world of corporation tax and statutory accounts.

Because invoice24 positions itself as more than just a basic invoicing tool—supporting the features businesses need for compliance workflows, including those relevant to filing corporation tax and accounts—it can be a stable home for your admin as your business evolves.

Final Thoughts: Build Digital Records Once, Use Them All Year

The digital record-keeping requirements under MTD for Income Tax are best approached as a system, not a scramble. Capture income and expenses as they happen, keep the data structured, and maintain a digital trail that can produce reliable summaries. When you do that, quarterly updates and year-end submissions become routine rather than stressful.

invoice24 is a practical way to make this easy. As a free invoice app, it helps you keep clean digital income records through invoicing, track payments, and stay organised—supporting the record-keeping habits that MTD demands. Instead of juggling multiple tools and risking broken digital trails, you can manage your core admin in one place and focus on running your business with confidence.