MTD Digital Records: What Counts as Digital Record Keeping?

One of the most common questions about Making Tax Digital is deceptively simple: what exactly counts as a digital record? HMRC requires you to keep "digital records" — but the definition is not as obvious as it sounds, and getting it wrong could leave you non-compliant without realising it.

This article explains what HMRC actually requires, what formats are acceptable, where spreadsheets fit in, and the most common mistakes people make.

Under MTD for Income Tax, individuals who meet the income threshold must maintain digital records of their business transactions using "functionally compatible software." The records must be kept digitally from the point of entry — meaning you cannot write transactions in a paper notebook and type them into software once a quarter.

HMRC's definition of digital records includes:

  • Income transactions — every payment received, with the date, amount, and source
  • Expense transactions — every business expense, with the date, amount, and category
  • Summary totals — quarterly totals of income and expenses that are submitted to HMRC

The software you use must be able to submit quarterly updates directly to HMRC via their MTD API. This is the "functionally compatible" part — it is not enough to simply record transactions digitally. The software must also communicate with HMRC's systems.

Do Spreadsheets Count?

This is the most frequently asked question, and the answer is: it depends.

Spreadsheets Alone — No

A standalone spreadsheet (Excel, Google Sheets, or similar) does not meet the MTD requirement on its own. Even if you meticulously record every transaction in a perfectly formatted spreadsheet, you cannot use a spreadsheet to submit quarterly updates to HMRC. Spreadsheets lack the API connection that MTD demands.

Spreadsheets With Bridging Software — Yes

HMRC does allow a "bridging" approach. You can record your transactions in a spreadsheet, provided that spreadsheet is linked to bridging software that extracts the data and submits it to HMRC via the MTD API.

In practice, this means: 1. You record income and expenses in your spreadsheet 2. Bridging software reads the data from your spreadsheet 3. The bridging software submits the quarterly update to HMRC

This is technically compliant, but it has drawbacks. The bridging software adds an extra step and an extra cost. You need to ensure your spreadsheet is formatted correctly for the bridging software to read it. And if you make errors in the spreadsheet, the bridging software will submit those errors to HMRC.

The Better Option

For most people, using purpose-built MTD software is simpler, cheaper, and less error-prone than the spreadsheet-plus-bridging approach. Software like ClearMTD handles both the record keeping and the submissions in one place. For a breakdown of options, see our guide on the best MTD software for sole traders.

What Information Must Be Recorded

HMRC specifies the minimum information that must be included in your digital records:

For Each Income Transaction

  • The date the income was received
  • The amount
  • A description or category (e.g. sales income, rental income, freelance fee)

For Each Expense Transaction

  • The date the expense was incurred
  • The amount
  • The category of expense (e.g. office costs, travel, stock, professional fees)

For Property Income (Landlords)

  • Rental income by property or portfolio
  • Property-related expenses by category
  • Mortgage interest payments (recorded separately due to the basic rate restriction)

What You Do Not Need to Record Digitally

  • Individual receipts and invoices do not need to be stored digitally (though keeping them is good practice for evidence purposes)
  • Bank statements themselves are not "records" under MTD — it is the individual transactions that must be recorded
  • Personal transactions that are not related to your business

Common Mistakes

1. Recording in Batches

Some people record a month's worth of transactions in one lump entry — for example, "March income: £3,000." HMRC expects individual transactions, not monthly totals. Each payment received and each expense incurred should be its own entry with its own date and amount.

There is some pragmatic flexibility here. HMRC has acknowledged that very small transactions can be grouped (for example, a market trader's daily cash takings). But as a general rule, record each transaction individually.

2. Using Paper First, Then Digitising

If you write transactions in a paper diary and then type them into your software at the end of the quarter, you are technically not keeping digital records from the point of entry. HMRC's guidance states that transactions should be recorded digitally "as close to real time as reasonably practicable."

In practice, HMRC is unlikely to audit how quickly you enter each transaction. But if there is ever a discrepancy between your paper records and your digital records, you could have a problem.

3. Not Categorising Expenses

Entering every expense as "miscellaneous" or "other" does not meet the spirit of the requirement. HMRC expects expenses to be categorised according to standard categories — travel, office costs, stock and materials, professional fees, and so on. Your MTD software should provide these categories. For a full list of allowable categories, see our article on what expenses you can claim under MTD.

4. Confusing Bank Feeds With Record Keeping

Many MTD tools offer automatic bank feeds that import transactions from your bank account. This is helpful, but importing transactions is only half the job. You still need to categorise each transaction correctly and confirm whether it is a business or personal item. An uncategorised bank feed is not a compliant digital record.

5. Assuming Your Accountant Handles Everything

Your accountant can access your records and submit on your behalf, but the obligation to maintain digital records throughout the year sits with you. If you only share information with your accountant once a year, you are not meeting the quarterly requirement — regardless of how good your accountant is.

HMRC-Recognised Software

HMRC maintains a list of software providers that are recognised as compatible with MTD for Income Tax. Being on this list means the software has been tested against HMRC's API and can submit quarterly updates, End of Period Statements, and Final Declarations.

When choosing software, check that it appears on HMRC's recognised list. Using non-recognised software means your submissions may not be accepted, and you could face penalties for non-compliance.

ClearMTD is HMRC-recognised and designed specifically for MTD for Income Tax. It handles digital record keeping and all required submissions in one simple interface — no bridging software needed, no accounting jargon, and no features you will never use.

Try ClearMTD for free and see how simple digital record keeping can be.

What About Receipts and Invoices?

A common misconception is that MTD requires you to scan and store every receipt digitally. It does not. MTD is about recording transactions — the amounts, dates, and categories — not about storing source documents.

That said, keeping receipts is still important. If HMRC queries an expense, you need evidence to support it. Many people photograph receipts and store them digitally as good practice, but this is a separate matter from the MTD digital records requirement.

The Key Takeaway

Digital record keeping under MTD means recording your income and expense transactions in software that can submit data directly to HMRC. Spreadsheets alone do not qualify. Paper records do not qualify. And recording everything in a lump sum at the end of the quarter is not ideal.

The easiest way to comply is to use purpose-built MTD software, enter transactions regularly (weekly is a good habit), and let the software handle the quarterly submissions. It is simpler than it sounds, and far simpler than the spreadsheet-plus-bridging alternative.

For more on how MTD changes the traditional Self Assessment process, see our guide on MTD vs Self Assessment.

Frequently Asked Questions

Can I use Google Sheets for MTD?

Google Sheets alone does not meet the requirement. You would need bridging software to connect Google Sheets to HMRC's MTD API. Purpose-built MTD software is usually simpler and often cheaper than this combination.

How often do I need to update my digital records?

HMRC says records should be maintained "as close to real time as reasonably practicable." In practice, updating weekly or at least monthly is advisable. You must have your records up to date in time for each quarterly submission deadline.

What happens if I lose my digital records?

You should keep backups of your digital records. If using cloud-based MTD software, your records are typically backed up automatically. If you lose your records and cannot reconstruct them, you may face difficulties with HMRC queries and potential penalties for inadequate record keeping.

Do I need to keep digital records of personal expenses?

No. Only business income and expenses need to be recorded digitally under MTD. If you use a single bank account for both personal and business transactions, you only need to record the business-related items in your MTD software.

Is there a penalty for not keeping digital records?

Yes. Failure to maintain adequate digital records is a compliance failure under MTD. HMRC can issue penalties for inadequate record keeping, separate from any penalties for late or incorrect quarterly submissions.