How to set up MTD-compatible digital records from scratch

Introduction

For sole traders and landlords earning over £50,000, Making Tax Digital for Income Tax Self Assessment (MTD ITSA) kicks off on 6 April 2026. It’s essential to prepare by setting up digital records that comply with HMRC guidelines.

Understanding digital records

Under MTD ITSA, HMRC requires all income and expenses to be recorded digitally. This means using approved software to capture data and transmit it to HMRC without manual re-keying.

Essential digital records

You need to keep digital records of:

• Sales and income
• Expenses
• VAT (if you’re registered)
• Bank transactions

Setting up your MTD-compatible system

1) Choose HMRC-recognised software

Select software that's recognised by HMRC for MTD ITSA. Consider features, ease of use, and cost. Ensure it can submit data directly to HMRC.

2) Link your bank account

Connect your bank account to automate transaction importing. This reduces data entry and ensures accuracy.

3) Categorise your transactions

Proper categorisation is key. Use categories specific to trades such as materials, fuel, tools, subcontractors, insurance, and PPE.

4) Set up quarterly submission reminders

Schedule reminders for quarterly submissions. MTD requires four updates yearly and a final end-of-period statement.

Choosing the right software

When selecting HMRC-recognised software, look for:

• Direct submission capabilities
• Real-time bank feeds
• Trade-specific categorisation options
• User-friendly interface

Bridging software for spreadsheet users

If you're still reliant on spreadsheets, bridging software is an interim solution. It allows spreadsheets to communicate with HMRC systems, forming a transitional step towards full digital records.

Setting up categories for trades

Ensure your software supports categories pertinent to your trade. These include:

• Materials
• Fuel
• Tools
• Subcontractors
• Insurance
• PPE

Understanding quarterly submissions

You'll need to update HMRC four times a year, plus a final declaration. Each update includes income and expenses, easing your end-of-year tax process.

Self-assessment calculator and mileage calculator can help with estimations.

InvoiceAdept is a tool that keeps your records submission-ready, ensuring compliance with MTD ITSA requirements.

Records checklist

Practical examples

Let’s look at a typical scenario for a self-employed electrician named John:

1. John purchases materials for a job — he logs these expenses digitally using his HMRC-approved software.
2. He completes the job and issues an invoice using an invoice generator tool, which automatically updates his digital records.
3. John receives payment, which is automatically logged through the linked bank feed.
4. At the end of the quarter, John uses his software to review and categorise all transactions, ensuring everything aligns with HMRC requirements.
5. He submits his quarterly update directly through the software, keeping him compliant with MTD ITSA.

Step-by-step guide to MTD ITSA compliance

Follow these steps to ensure compliance:

1. Research and choose an HMRC-recognised software package that suits your business needs.
2. Set up your software, linking it with your bank account for seamless transaction logging.
3. Regularly review and categorise your transactions to ensure accurate records.
4. Use tools like the VAT calculator to assist with accurate tax calculations.
5. Schedule quarterly submissions and ensure timely updates to HMRC.

Further guidance

For more details, refer to the HMRC MTD ITSA guidance.

FAQ

What happens if I miss a quarterly submission?

If you miss a quarterly submission, you may face penalties from HMRC. It's crucial to set reminders and use software that alerts you to upcoming deadlines.

Can I still use spreadsheets for MTD ITSA?

Yes, but you’ll need bridging software to connect your spreadsheets with HMRC. This acts as a temporary solution while you transition to full digital records.

How do I choose the right software for my trade?

Look for software that offers trade-specific categorisation, direct submission capabilities, and a user-friendly interface. Consider the cost and any additional features that might benefit your business.

What records do I need to keep digitally?

You must keep records of all sales, income, expenses, VAT (if applicable), and bank transactions. This ensures you have a comprehensive digital log for HMRC submissions.

Where can I find more information on MTD ITSA?

Further information is available on the HMRC website, which offers comprehensive guidance on MTD ITSA requirements.