MTD Record Keeping Requirements: What HMRC Actually Wants

Making Tax Digital is not just about how you submit returns to HMRC. It fundamentally changes how you must keep your business records in the first place. Paper receipts in a shoebox, Excel files updated manually, or PDF invoices sitting in an email folder are no longer enough. HMRC now requires ‘digital records’ with ‘digital links’ throughout the process, and non-compliance can trigger penalties even if your submitted return is technically correct.

This guide explains exactly what HMRC requires under MTD record-keeping rules: which records you must keep, what ‘digital’ actually means, the crucial ‘digital links’ rule that trips up thousands of businesses, how long to retain records, and the penalties for getting it wrong. Written by ICAEW chartered accountants who set up MTD-compliant record-keeping systems every day.

The Three Core MTD Record-Keeping Rules

Under MTD, you must:

1.     Keep specified records digitally in HMRC-approved format (not paper only)
2.     Maintain digital links between records so data flows without manual re-entry
3.     Retain records for at least 6 years from the end of the relevant tax period

Key insight: MTD record keeping is not just about your submitted return. HMRC can inspect your underlying records at any time, and non-compliant records trigger penalties independently of whether your return itself was correct. The rules apply to how you keep records daily, not just what you submit quarterly.

What Counts as a ‘Digital Record’ Under MTD?

A digital record is a record kept electronically in HMRC-approved format. Specifically:

Acceptable Digital Records

•       Records stored in MTD-compatible accounting software (Xero, QuickBooks, FreeAgent, Sage, etc.)
•       Records stored in properly-configured Excel spreadsheets linked to bridging software
•       Records stored in industry-specific software that meets MTD API requirements
•       Records stored in databases that maintain digital linkage to submission software

NOT Acceptable Under MTD

•       Paper receipts as the only record
•       Excel files that are updated by re-typing from paper documents
•       PDF snapshots of invoices without underlying data extraction
•       Email folders full of invoice PDFs with no accounting entries
•       Handwritten cash books
•       Word documents summarising figures

Common misconception: ‘I use Excel so I am compliant’ is WRONG. Excel is only MTD-compliant when linked via bridging software AND updated using digital data (not manually re-typed from paper). An Excel file where you type in figures from paper receipts is NOT compliant under MTD digital records rules.

Which Specific Records Must You Keep?

For MTD VAT (Since April 2022)

•       Business name, address, and VAT registration number
•       VAT accounting scheme used (Standard, Cash, Flat Rate, Annual)
•       VAT on goods and services supplied (sales)
•       VAT on goods and services received (purchases)
•       Time of supply (tax point) for each transaction
•       Value of each supply excluding VAT
•       Rate of VAT applied to each supply
•       Any adjustments to VAT (bad debt relief, error correction, etc.)
•       Daily gross takings for retail schemes
•       Value of purchases and sales under Margin schemes

For MTD ITSA (From April 2026)

•       Business name and business type
•       Each transaction with date, amount, and category (income or expense type)
•       Property income and expenses (for landlords)
•       Self-employment income and expenses (for sole traders)
•       Details supporting Capital Allowances claims
•       Adjustments for private use of business assets
•       Simplified expense method use (mileage rates, home office flat rates)

For MTD Corporation Tax (From April 2027, Planned)

•       All Companies Act 2006 accounting records
•       Detailed transaction data supporting Corporation Tax computation
•       Records supporting reliefs and allowances claimed
•       Records of directors’ transactions and loans

The ‘Digital Links’ Rule: What HMRC Actually Means

This is the most misunderstood MTD rule and the one that trips up the most businesses. A digital link is a transfer of data from one part of your accounting process to another that happens electronically, without human intervention. The whole point is that data flows automatically from source to submitted return, without anyone re-typing it along the way.

Acceptable Digital Links

•       Bank feed importing transactions from your business bank into your accounting software
•       CSV file exported from one system and imported into another (both actions are digital)
•       API connection between two software packages sharing data
•       Formula-linked cells within a single spreadsheet
•       Linking cells between separate spreadsheets
•       Emailed spreadsheet imported into your accounting system
•       Data transferred by direct database connection

NOT Digital Links (Breaks the Chain)

•       Manually re-typing figures from one system into another
•       Reading a printed report and entering the totals into a different system
•       Using paper as an intermediate step between two digital systems
•       Copying and pasting numbers by hand rather than using software transfer

Practical example: You have a shop till system that produces daily sales reports. If those sales flow into your MTD VAT software automatically (via API, CSV import, or direct integration), you have a digital link. If someone reads the till report and types the totals into QuickBooks each day, you have BROKEN the digital link chain, and you are non-compliant.

Record Retention: How Long Must You Keep MTD Records?

Retention practical tip: For a mixed VAT and Income Tax sole trader, the safe rule is to keep everything for 6 years minimum. If HMRC opens any enquiry, retain everything relating to that enquiry until it is formally closed, regardless of the 6-year rule.

Format Requirements: How Records Must Be Stored

Acceptable Storage Formats

•       Cloud-based accounting software (recommended – automatic backups)
•       Locally-installed accounting software (must be backed up regularly)
•       Bank feed integrated systems
•       Digital receipt capture via mobile apps (Dext, ReceiptBank, Xero mobile scanner)
•       PDF scans of paper receipts stored in searchable software

Records Must Be

•       Readable at any time (not corrupted or degraded)
•       Accessible in reasonable time if HMRC requests
•       Original quality (scans must be clear, not blurry)
•       Complete (not just partial extracts)

Cloud advantage: Cloud-based MTD software (FreeAgent, Xero, QuickBooks Online) automatically handles backup, retention, and accessibility. Locally-installed software requires you to manage backups yourself. For most small businesses, cloud is the safer choice.

Bridging Software: Making Excel MTD-Compliant

If you insist on using Excel for MTD, bridging software connects Excel to HMRC’s MTD systems. However, using bridging software correctly requires strict adherence to digital links rules.

How Bridging Software Works

4.     You maintain records in Excel (or Google Sheets)
5.     Bridging software reads specific cells from your spreadsheet
6.     Bridging software submits those figures to HMRC via MTD API
7.     Digital link is maintained throughout

Bridging Software Compliance Requirements

•       Data must enter Excel via digital link (not by re-typing paper receipts)
•       Formulas linking cells within Excel are acceptable
•       Linking between separate Excel files is acceptable
•       Manual entry of figures from paper documents breaks compliance
•       Bridging software must be HMRC-approved (see gov.uk list)

Popular UK Bridging Software

•       VitalTax (£15+ per year)
•       123Sheets (£40 per year)
•       ANNA (free for basic use)
•       Absolute VAT Filer
•       Tax Optimiser

Bridging software honest assessment: It is legal MTD compliance but rarely optimal. Businesses using bridging software typically spend 5 to 10x more time on VAT admin than businesses on proper accounting software. Bridging is a fallback for businesses genuinely wedded to Excel, not a good primary approach.

Penalties for MTD Record-Keeping Failures

HMRC can issue penalties for record-keeping failures separately from any penalties for late or incorrect returns. These include:

HMRC record-keeping compliance checks: HMRC selectively reviews record-keeping compliance separately from tax return correctness. A business with perfectly correct submitted returns can still be penalised for non-compliant record-keeping if HMRC checks their systems. This is a real enforcement risk, not a theoretical one.

Case Study: Fixing Non-Compliant MTD Records Before HMRC Inspection

A small independent café based in the Sheffield area contacted us in early 2026 in a stressful position. They had been VAT-registered since 2023 and thought they were MTD compliant because they submitted VAT returns via bridging software from Excel. HMRC had just written to notify them of a compliance visit in 6 weeks time. Their previous bookkeeper had been re-typing figures from paper till receipts into Excel each week. This was actually non-compliant with MTD digital links rules, and they did not realise.

Their situation:

•       VAT-registered since 2023
•       Submitting via VitalTax bridging software (legitimate MTD method)
•       BUT records maintained by re-typing paper till receipts into Excel (digital link broken)
•       Paper till receipts kept in shoeboxes going back 3 years
•       HMRC compliance visit scheduled in 6 weeks
•       Estimated 4,000+ transactions per year across 3 years to fix

What we did:

8.     Diagnosed the specific compliance failure (broken digital link between till and accounting records)
9.     Migrated the business to QuickBooks Online with integrated till system connector
10. Set up automatic digital feed from EPOS till to QuickBooks
11. Reconstructed the previous 3 years of till transactions using original till Z-reports and daily banking data
12. Digitised the paper till receipts using Dext receipt capture (retrospective compliance evidence)
13. Prepared full documentation of the current compliant system for the HMRC visit
14. Attended the HMRC visit with the client to explain the newly compliant system

Outcome: HMRC accepted the newly compliant system and the reconstructed historic records. No penalties were issued because we had proactively addressed the compliance failure before HMRC arrived. Future record-keeping now fully automated with digital links throughout. Ongoing bookkeeping time reduced from 6 hours per week to about 2 hours per week. Our one-off remediation fee was £1,850 plus ongoing monthly fee of £180. Total penalties avoided: likely £800 to £2,400+ (based on the number of digital link failures HMRC could have identified).

How to Set Up MTD-Compliant Record Keeping (Practical Steps)

Step 1: Choose Proper Accounting Software

Do not rely on Excel alone. FreeAgent, Xero, QuickBooks, or Sage all maintain digital links automatically. Choose one appropriate to your business size.

Step 2: Set Up Bank Feed

Connect your business bank to the accounting software. This ensures every transaction has a digital link from source. This is the single most important compliance step.

Step 3: Enable Digital Receipt Capture

Use the mobile app receipt capture in your accounting software or a dedicated app like Dext. Photograph receipts on your phone. The image is stored digitally and OCR technology extracts the data automatically. Original paper can be thrown away once digitally captured.

Step 4: Configure Sales System Integration

If you have EPOS tills, e-commerce platforms, or invoicing systems, integrate them with your accounting software. Data flows automatically. Avoid any manual re-typing between systems.

Step 5: Document Your Digital Link Chain

Keep a simple document showing where each data type enters your system and how it flows through to submitted returns. This makes any future HMRC compliance visit dramatically easier.

Step 6: Establish Backup and Retention

Cloud accounting software handles this automatically. If using local software, set up automatic backups. Keep records accessible for 6 years minimum.

MTD Record Keeping: FAQs

What records do I need to keep under MTD?

Depends on the MTD regime. MTD VAT: sales, purchases, VAT rates, tax points, accounting scheme details, and adjustments. MTD ITSA: transactions with dates, amounts, categories, income and expense records. MTD Corporation Tax: all Companies Act records plus transaction detail supporting the CT computation.

What does ‘digital records’ actually mean?

Records stored electronically in HMRC-approved format that maintain digital links throughout the process. Paper receipts alone are NOT digital records. Excel files updated by re-typing from paper are NOT compliant. Records must be in accounting software or spreadsheets fed by digital links (bank feeds, imports, APIs).

Are paper receipts still valid under MTD?

Paper receipts alone are not sufficient for MTD compliance. However, paper receipts photographed via mobile receipt capture apps (Dext, Xero mobile, QuickBooks mobile) become acceptable digital records once uploaded. The physical paper can then be thrown away. The digital version is the compliant record.

What is the ‘digital links’ rule?

Data must flow electronically between systems without manual re-entry. Bank feed to accounting software = digital link. Typing figures from a paper report into accounting software = broken digital link. This is the most commonly failed MTD compliance requirement.

How long do I have to keep MTD records?

6 years minimum for VAT and Corporation Tax. 5 years after 31 January following the tax year for MTD ITSA (typically 5 years 10 months). If HMRC opens any enquiry, retain everything relating to it until enquiry closes, regardless of standard periods.

Can I still use Excel under MTD?

Yes, with bridging software. However, digital links rules still apply. Data must enter Excel via digital link (bank statement import, CSV from till, etc.), not by manual re-typing from paper. Excel with bridging software is legal but rarely optimal versus proper accounting software.

What is bridging software?

Software that connects Excel spreadsheets to HMRC’s MTD systems, allowing VAT return submission from Excel. Popular options: VitalTax, 123Sheets, ANNA. Must be HMRC-approved (list on gov.uk). Still requires digital links to be maintained within Excel.

Can HMRC penalise me for record-keeping failures?

Yes. Failure to keep required records: £400 per failure. Failure to maintain digital links: £5 to £15 per day per failure. Deliberate destruction of records: £3,000 per failure. HMRC checks record-keeping compliance separately from tax return correctness.

Do I need to keep records if I use cloud accounting software?

Cloud accounting software handles retention automatically. However, YOU are responsible for ensuring the software captures the correct data via digital links. Cloud storage alone does not guarantee compliance if the underlying data entry is not digitally linked.

How should I handle paper receipts under MTD?

Photograph them immediately using mobile receipt capture in your accounting software or dedicated app like Dext. The photograph plus OCR-extracted data becomes the compliant digital record. Original paper can then be discarded. This saves substantial storage over 6-year retention periods.

What if my till system does not integrate with accounting software?

Options: 1) Change till system to one that integrates. 2) Export daily Z-reports as CSV and import into accounting software (this is a digital link). 3) Use manual daily takings entries but be aware this may be non-compliant. Option 1 or 2 is strongly recommended over option 3.

Can I keep records in Google Sheets?

Yes, with bridging software that supports Google Sheets. Same digital links rules apply. Data must enter via digital link, not manual re-typing. Google Sheets works particularly well for businesses already using Google Workspace for other purposes.

What if HMRC finds my records non-compliant during a visit?

Options depend on the specific failure. HMRC may issue penalties (£400 per failure), require you to reconstruct records, or in serious cases open a broader tax enquiry. Proactive remediation before a visit (as in our case study) can substantially reduce penalty exposure.

Does MTD require me to change how I do everything?

No, but it does require your record-keeping to be digital and connected. If you already use MTD-compatible software with bank feeds, you likely need minimal changes. If you use paper or manually-updated Excel, significant changes are needed to become compliant.

Are there any exemptions from MTD record-keeping rules?

Very limited: digital exclusion (age, disability, remote location without internet), religious beliefs preventing digital record-keeping, or bankruptcy proceedings. General preference for paper records is NOT a valid exemption. HMRC reviews each application individually.

Get MTD Record Keeping Right – Free ICAEW Consultation

Non-compliant record-keeping is one of the biggest hidden risks under MTD. Businesses often assume they are compliant because their submitted returns are correct, then discover during HMRC visits that their underlying records violate the digital links rules. Fixing this proactively is dramatically cheaper than fixing it during an HMRC enquiry.

At MTD – Making Tax Digital (part of B1 Accountants), our ICAEW chartered accountants set up MTD-compliant record-keeping systems for UK businesses every day. We can:

•       Audit your current record-keeping for MTD compliance
•       Identify broken digital links and other compliance gaps
•       Migrate you to MTD-compliant software (FreeAgent, Xero, QuickBooks, Sage)
•       Set up bank feeds, receipt capture, and till integrations
•       Reconstruct historic records if compliance failures exist
•       Prepare you for HMRC compliance visits with full documentation
•       Provide ongoing MTD compliance at fixed monthly fees from £40