Making Tax Digital (MTD): The complete guide to digital record keeping

Key Takeaways

• MTD ITSA is mandatory for sole traders and landlords, starting with the $\text{£50,000}$ income threshold from April 2026, requiring them to keep detailed digital records and submit quarterly updates to HMRC.
• The fundamental building block of compliance is the unbroken digital record, meaning all income and expenditure must be captured and stored using MTD-compliant software or a combination of spreadsheets and bridging software.
• The primary challenge for accountants is to proactively communicate the simplicity and necessity of the change to clients, emphasizing that compliant software is the key to minimizing anxiety and avoiding potential fines.
• Automation software like AutoEntry provides the necessary first step, enabling the seamless collection, categorization, and coding of transactional data to generate the compliant digital records required for MTD ITSA reporting.

MTD for Income Tax Self Assessment (ITSA)

HMRC drives the Making Tax Digital (MTD) agenda on the basis that it believes businesses may be making errors or misreporting when submitting their tax returns, which can subsequently affect the overall tax yield. As much of our commercial life is now run with the help of technology, HMRC is increasingly expecting businesses to record and report to it digitally too.

By asking businesses to record their financial transactions using compatible software, the goal is to improve the overall quality of reporting and, of course, ensure it is collecting the right amount of tax due.

This transition, known as MTD for Income Tax Self Assessment (ITSA), will become mandatory for over 2.7 million sole traders and landlords.

The digital record as the building blocks of compliance

Where manual record keeping and even paper ledgers may be perfectly adequate when appropriately done, recording transactions and keeping them in software (including spreadsheets) will become mandatory for all self employed and landlord taxpayers with income over £10,000 from April 2024.

Each of these individual income and expenditure entries should be viewed as a ‘digital record’, which in turn form a larger digital record for that entity. Data should be stored digitally, manipulated digitally, and will need to be submitted digitally to HMRC - an unbroken digital chain, with no manual input.

This digital approach therefore forms the fundamental building block of compliance, and needs to be complete, accurate and available in a timely way.

Digital record keeping: What counts as a compliant MTD record?

While the details are still being finalised as to what data will need to be stored and reported on, the individual line items are likely to be those that we are already accustomed to: Dates, company names, amounts, VAT, all recorded and coded correctly.

HMRC has confirmed that spreadsheets will be allowed,  however the data will still need to be filed in a compliant way, which may mean using third party bridging software similar to that available for MTD for VAT submissions.

Clients using commercially available accounting software, should check with their supplier to ensure that they will be MTD ITSA compliant and in what timescales. AutoEntry already collects the core data that will be needed to be compliant, and will work with the most common ledger software to help finalise and file the quarterly updates.

The role of quarterly updates and annual final declarations

The primary function of keeping digital records is to enable quarterly updates, year end adjustments and final confirmation. HMRC are likely to analyse the data to check for general quality, but will maintain the right to investigate any data submitted and issue fines including for behavioral factors such as persistent late filing, or sending in wilfully inaccurate data.

It’s not known if the data will be used for any other purpose by HMRC, and currently they are saying that there is no intention to collect tax quarterly (although clearly this is a possibility in the future). From an accountant's perspective, there is obviously an opportunity to have greater visibility over client data and to provide useful updates and information on tax liability, cash, general performance and even how close they may be to the VAT threshold. Things which might not always be clear until year end if they are not keeping up to date and clear financial records generally.

Acknowledging the client challenge

Given that the new MTD ITSA regulations will cover over 3.5million entities there is going to be a huge spectrum of types of businesses involved, and just as much variation in the way they currently think and look after their financial admin.

Some may have developed intricate systems across numerous apps on their phone, while others may sit down on a half yearly or annual basis. For each the changes will require a different approach to what they are currently used to, will require compliant software, and possibly more involvement from you, their adviser.

Although there are positives for having the data to hand, few clients will perceive it as having many direct business benefits. This is a challenge that many accountants and bookkeepers will recognise, and needs to be acknowledged and addressed as soon as possible.

Explaining digital record keeping to clients

Talking through the MTD ITSA timeline with clients needs to start as soon as is practical. Explaining the fundamentals, including what the options are for keeping digital records is an important part of this. While many will see that there is a long time to go before they need to start worrying about it, the reality is that this may cause both them and you more stress as the deadline looms.

Keeping your service and client facing technology solutions to their most simplest,will help reduce any of the fear or anxiety they may have in making the transition.

Simple steps to prepare clients for MTD record keeping

Talking through the MTD ITSA timeline with clients needs to start as soon as is practical. Explaining the fundamentals, including the options for maintaining digital records, is an important part of this. While many may see that there is still a long way to go before they need to start worrying about it, the reality is that this may cause both them and you more stress as the deadline approaches.

Keeping your service and client-facing technology solutions simple will help reduce any fear or anxiety they may have in making the transition.

How AE helps to record, categorise and automate digital records

AutoEntry is step one for MTD ITSA compliance. It allows you to collect, collate and code the essential transaction data and create the automation that will be needed to handle the volume of data from your sole trader and landlord clients. Turning paper and documents into compliant digital records ready for you to analyse, reconcile and file.

MTD ITSA Compliance Through Automation

The shift to Making Tax Digital (MTD) for ITSA is a mandate that requires all affected sole traders and landlords to maintain an uninterrupted digital record. This is a critical requirement that demands preparation ahead of the 2026 and 2027 deadlines.

The solution to meeting this compliance challenge—and providing timely, accurate quarterly updates—lies in automation.

You can confidently address MTD requirements by implementing a specialized tool like AutoEntry now:

• Ensure the Digital Audit Trail: Automatically capture and code essential transaction data to create the compliant digital record HMRC requires.
• Reduce Stress: Eliminate the fear of non-compliance and enable smooth, stress-free quarterly submissions.
• Deliver Value: Free up time to move from manual data entry to higher-value tax advisory for your clients.

AutoEntry is the essential first step to MTD ITSA compliance, providing the automation required to make both you and your clients MTD-ready well ahead of the deadline.

Frequently Asked Questions (FAQ)

‍What is the digital record-keeping requirement for Making Tax Digital (MTD) in the UK?

For MTD, sole traders and landlords must keep digital records of all income and expenses relating to their businesses using HMRC-compatible software that can send quarterly updates directly to HMRC.

Can I use a spreadsheet for Making Tax Digital for ITSA?

Yes, HMRC permits the use of spreadsheets, but you must use bridging software (like AutoEntry) to transfer the data digitally and compliantly to HMRC, thereby creating a digital link.

What are the key deadlines for Making Tax Digital (MTD) for Income Tax?

MTD for ITSA is being phased in: it is mandatory for those with income over $\text{£50,000}$ from April 2026, and for those with income over $\text{£30,000}$ from **April 2027}$.

How does AutoEntry help with MTD ITSA compliance?

AutoEntry is the first step in compliance: it automates the collection, categorization, and digital storage of income and expenditure documents, creating the necessary digital record that feeds into your MTD-compatible accounting software.

What information needs to be included in an MTD digital record?

A digital record must contain the date, amount, category, and VAT (if applicable) for every income and expenditure transaction, ensuring an unbroken digital audit trail.