Digital Record-Keeping for Making Tax Digital for Income Tax

For each sale or service, you must record the date provided, amount received, and the category of income. Additionally, if VAT-registered, you need to include the VAT charged, along with the customer's name or reference, a description of goods or services, and the payment method with the date received. Retail businesses benefit from an easement that allows recording a single daily gross takings figure. This must include all payment types including cash, card, and electronic payments, but excludes voids, refunds, and training till transactions. If you use the cash basis accounting method, record income when money is actually received rather than when you invoice. This simpler approach works well for most small businesses.

For each rental property, maintain records showing the tenant's name, property address or reference, rent due date and period covered, amount received and date, any rent arrears, and deposits held in a separate record. Landlords with jointly owned properties can use an easement allowing one digital record per income category per quarter rather than recording every transaction. Your software must still be MTD-compatible, and your share of income must be clearly identified. For instance, you might record "Property: 24 Oak Lane, Bristol. Q1 2026-27 (6 Apr - 5 Jul 2026). Rental income received: £2,700 (your 50% share)."

You must also digitally record business grants or subsidies, insurance payouts that relate to your business, balancing charges on capital allowances, and any trading income from abroad.

For each business expense, record the date incurred or paid depending on your accounting basis, supplier name, description of goods or services purchased, gross amount spent, and VAT paid if you're VAT-registered and can reclaim it. Key expense categories include cost of goods sold or stock, wages and staff costs, rent and property costs, repairs and maintenance, vehicle and travel expenses, phone and office costs, marketing and advertising, professional fees for accountants and solicitors, finance costs from loans and overdrafts, and depreciation with capital allowances. Note: You can use simpler categorisation for your income sources if your turnover is below the VAT threshold (£90,000) for each income source.

Allowable property expenses that you must record include letting agent fees, property insurance, maintenance and repairs but not improvements, utilities you pay if included in rent, council tax if you pay it, ground rent and service charges, and accountancy fees. Residential property finance costs require special attention. You must record mortgage interest and loan interest separately from other expenses. This is critical because these costs are no longer fully deductible. Instead, they become a 20% tax credit. Your software should have a dedicated category specifically for residential property finance costs. For jointly owned properties, you can use an easement allowing one digital record per expense category per year rather than per transaction. You might record "Maintenance costs for jointly owned properties 2026-27: £3,450 (my 50% share: £1,725)."

Eligible Criteria: If your total UK property turnover or self-employment turnover is less than £90,000, you can choose a simpler way to categorize your income and expenses for tax purposes. This applies whether you're a landlord or a sole trader. For Sole Traders: If your turnover is below £90,000, you only need to record whether a transaction is income or expense. You do not need to detail the specific categories of income or expenses. For Landlords: You still need to categorise your expenses but more simply. You must record: Whether a transaction is income or an expense. If the expense is related to restricted finance costs (e.g., mortgage interest).

If your turnover reaches the VAT threshold of £90,000, you must categorize all your records in full detail for the income source that crossed the threshold. This means you must go back and categorize all income and expenses: From the beginning of the current tax year. For the following tax year. If you don’t categorize the records fully, you cannot submit your quarterly updates or tax return.

If you’re unsure whether your turnover will reach the VAT threshold, it’s best to categorize your records in full detail from the start. This will prevent any issues if you cross the £90,000 threshold later.

Retailers can choose to record daily gross takings instead of recording each individual sale. This simplifies tracking for businesses with frequent sales, such as stores.