HMRC Digital Record Keeping: What Counts and How to Stay Compliant

What HMRC Means by Digital Records

HMRC requires that the following information is recorded digitally for each business transaction: the date of the transaction, the amount, and the category (type of income or expense). For VAT purposes, additional fields are required including the VAT rate and the supplier's VAT registration number.

Crucially, these records must be held in software that can submit data directly to HMRC via their API. Keeping a spreadsheet and then manually re-entering figures into HMRC's website does not satisfy MTD: the data must flow digitally from your records to HMRC without manual re-keying.

HMRC's own phrase for this is "digital links": every transfer of data from one system to another in your record-keeping chain must be digital. Copy-pasting, or printing and re-entering, breaks the digital link.

What You Must Record for Each Transaction

For each sale (income): the date of the sale, the total amount of the sale, and the sales category (for example, self-employment income, rental income).

For each business expense: the date, the amount, the expense category (for example, travel, office costs, professional fees), and for VAT purposes, the VAT element and supplier VAT number if applicable.

You do not need to attach a copy of every receipt or invoice to your digital records. HMRC does not receive or store attachments. However, you must keep the underlying documents for a minimum of six years in case of an enquiry. They can be stored digitally (scanned photos of receipts are fine) or in paper form.

Can I Use a Spreadsheet?

HMRC allows the use of spreadsheets as part of your record-keeping, but with a significant caveat: the spreadsheet alone is not sufficient. You must use bridging software that reads the data from your spreadsheet and submits it to HMRC digitally. The bridging software creates the required "digital link" between your spreadsheet and HMRC.

In practice, dedicated accounting software like FileThat is simpler than a spreadsheet plus bridging software. Everything is in one place, the categories match HMRC's taxonomy, transactions can be captured from uploaded bank statements, and submissions happen directly from within the app.

Bank Statement Upload vs Manual Entry

A practical way to maintain digital records is to upload bank statements (PDF) and let your accounting software extract the transactions. You then review and categorise each one as income or expense with a few clicks.

Manual entry (typing in each transaction yourself) is also permitted, but is slower and more error-prone. Many people use a hybrid: statement uploads for regular transactions, manual entry for cash sales or expenses paid from a personal account.

FileThat lets you upload bank statements and convert the extracted transactions into Digital Records. Categories are suggested based on merchant history, and you can review and adjust before confirming.

How Long to Keep Records

HMRC requires sole traders to keep business records for a minimum of five years after the 31 January submission deadline for the relevant tax year. In practice this means records from the 2025–26 tax year (filed by January 2027) must be kept until at least January 2032.

If HMRC opens an enquiry into your tax affairs, you may be required to produce records outside this window. Keeping records for seven years covers most scenarios comfortably.

Digital records stored in cloud-based software are generally safer than paper: they cannot be lost in a flood or fire, and most providers maintain backups. FileThat stores your data securely in UK-based servers.

Common Mistakes That Invalidate Digital Records

Using a consumer app like Notes or Excel without bridging software: the data exists but cannot be submitted to HMRC without breaking the digital link.

Recording net amounts when gross is required (or vice versa): always record the full transaction amount and separate out VAT if applicable.

Mixing personal and business transactions in the same account without clear categorisation: while not strictly illegal, it makes record-keeping messy and increases the chance of errors on submission.

Not recording cash transactions: all business income must be recorded, including cash payments. Omitting cash sales is one of the most common causes of HMRC enquiries.