Under Making Tax Digital for Income Tax (MTD IT), clients are required to keep digital records of their income and expenses throughout the tax year. These records must be held in functional compatible software and used as the basis for quarterly updates submitted to HMRC.
This article explains what digital records are, what they must contain for each income source, and how long they must be kept. It also covers the penalties that apply if records are not maintained correctly.
Please Note: Before selecting how your client will maintain their digital records, refer to MTD IT: Choosing the Right Workflow to identify which Capium workflow is most suitable. |
What Are Digital Records?
A digital record is a record of a transaction, created and stored using MTD-compatible software. It must be capable of being submitted to HMRC as part of a quarterly update or final declaration without requiring manual re-entry of figures between systems.
Paper-based records do not satisfy the MTD IT requirement on their own. However, original paper documents such as receipts and invoices may be retained as supporting evidence alongside the digital record.
The key requirement is a complete digital audit trail: each income and expense entry must be captured in software that is digitally linked to HMRC, so that data flows through without manual transcription.
| Please Note: Regardless of whether your client submits a consolidated return or a full detailed report, the underlying transactional data and values must always be stored and retained. The method of submission does not reduce the record-keeping obligation. HMRC expects the individual transactions to exist and to be available on request. |
What Must Digital Records Include?
The information that must be recorded digitally differs depending on the client's source of income. MTD IT covers three categories of income source.
Self-Employment (Sole Trader) Income
For each self-employment business, clients must record:
- The business name and description
- The start date of the business
- The business address
- Each item of income received during the period
- Each allowable expense incurred during the period, categorised by type
Clients with gross self-employment income below the VAT registration threshold may submit using simplified three-line accounts, reporting only total income, total expenses, and net profit or loss. However, the underlying transactions that make up those three lines must still be recorded and retained in full.
Clients with gross income above the VAT threshold must record expenses by category, for example: staff costs, premises costs, travel, advertising, finance charges, professional fees, depreciation, and other.
UK Property Income
For UK rental income, clients must record:
- Total rental income received for each property or portfolio
- Allowable expenses incurred, categorised by type
- Whether the cash basis or accruals basis is used
Clients below the VAT threshold may submit using simplified three-line reporting, but must still retain the individual transactions that support those figures. Clients above the threshold must categorise income and expenses, including a split between:
- Furnished holiday lettings (UK)
- Other UK property
Foreign Property Income
For overseas rental income, clients must record:
- Total rental income received from foreign properties, in GBP
- Allowable expenses incurred, in GBP
- Whether the cash basis or accruals basis is used
As with other income sources, simplified reporting does not remove the requirement to keep the underlying transactional records. Those records must remain available regardless of how the submission is made.
Supporting Documents
Digital records in MTD-compatible software do not replace the requirement to keep original supporting documents. Clients must also retain evidence to substantiate their digital entries, including:
- Sales invoices and receipts for income
- Purchase invoices, receipts, and bank statements for expenses
- Mileage logs and travel records where relevant
- Rental agreements and letting agent statements for property income
Supporting documents can be kept digitally (for example, scanned PDFs or photographs) or as paper originals. HMRC may request these during a compliance check.
How Long Must Digital Records Be Kept?
The minimum retention period for digital records is generally understood to be at least 5 years after the 31 January submission deadline for the relevant tax year. However, this can change and the figures stated here may not reflect the latest requirements at the time you are reading this article.
You should always refer to your accounting body (such as ICAEW or ACCA) or check the latest HMRC guidance directly before advising clients on retention periods.
Record Type | Minimum Retention Period (General Guidance) |
|---|---|
Digital records held in MTD-compatible software | At least 5 years after the 31 January submission deadline for the relevant tax year. Refer to HMRC guidance or your accounting body to confirm the current requirement. |
Supporting documents (receipts, invoices, bank statements) | At least 5 years after the 31 January submission deadline for the relevant tax year. Refer to HMRC guidance or your accounting body to confirm the current requirement. |
Records for a late-filed return (submitted more than 4 years after the deadline) | At least 15 months after the date of submission. Refer to HMRC guidance or your accounting body to confirm the current requirement. |
Penalties for Failing to Keep Digital Records
Record-Keeping Failure Penalty
If a client does not keep or preserve the required digital records in functional compatible software, HMRC can impose a penalty of up to £3,000 per quarterly period. This applies where:
- Records are not kept in MTD-compatible software
- There are breaks in the digital link, for example manual transcription between systems
- Records are incomplete, inaccurate, or not retained for the required period
Late Submission Penalties (Points-Based System)
From the 2027/28 tax year, HMRC operates a points-based penalty system for missed quarterly update and final declaration deadlines.
Trigger | Consequence |
|---|---|
Each missed quarterly update or final declaration deadline | 1 penalty point added to the client's record |
Reaching 4 penalty points | A fixed £200 penalty is charged |
Each further missed deadline after the threshold is reached | An additional £200 penalty per missed obligation |
Points below the threshold | Automatically removed 24 months after the missed deadline |
Points at or above the threshold | Only removed once all outstanding updates are submitted and compliance is maintained |
Please Note: No penalty points will be charged for late quarterly updates during the 2026/27 tax year. Clients must still submit quarterly updates before they can file their final declaration, but no points or financial penalties will apply to late quarterly submissions in this first year. |
Late Payment Penalties
Late payment penalties apply where tax is not paid by the 31 January deadline:
- A grace period applies: 30 days in the first year of MTD, reducing to 15 days in subsequent years
- If tax remains outstanding at the end of the grace period, a penalty of 3% of the outstanding amount applies
- Late payment interest accrues from the original due date at the Bank of England base rate plus 4%
Clients who contact HMRC and agree a Time to Pay arrangement within the grace period can avoid late payment penalties. Penalties are paused from the date of contact.
Please Note: The £3,000 record-keeping failure penalty is separate from the late submission penalty system. A client can incur both if they fail to maintain records and also miss a quarterly deadline. |