The information on this page is applicable if you are required to use MTD for Income Tax.
Keeping digital records of income and expenses
As part of the MTD for Income Tax requirements, you are required to keep digital records of self-employment and property income and expenses.
Keeping records digitally means recording income and expenses transaction entries in a software program (rather than on paper).
The documents relating to the transactions (e.g., invoices and receipts) do not have to be stored digitally; paper documents are acceptable.
If you currently do your bookkeeping in VT Transaction+, you are already keeping digital records and you just need to ensure that your records contain the required information.
Information required in digital records
Your digital records for MTD Income Tax should contain individual1 transactions of income and expenses.
The transactions should include the dates and amounts, and be categorised by the required tax categories for the purpose of submitting quarterly totals to HMRC - a quarterly update.
In VT Transaction+, the default income and expenses accounts for a sole trader/self-employment/property business are automatically assigned to the tax categories. Any new income and expenses accounts can be easily assigned to the tax categories.
Quarterly updates of income and expenses
Each quarter, you are required to submit totals of your income and expenses transactions by tax category to HMRC from MTD compatible software. This is called a quarterly update.
Digital links
Your income and expenses transactions data should link digitally to your quarterly update data (i.e., you cannot manually enter or copy/paste figures from your digital records to obtain your quarterly update figures).
If you use VT Transaction+ alone to record your transactions and submit quarterly updates, digital links between the two are naturally in place. For further information, see Digital Links.
Tax categories of income and expenses
|
Self-employment |
UK Property |
Foreign property |
|||
|---|---|---|---|---|---|---|
Turnover ≥ £90k |
Turnover < £90k |
Turnover ≥ £90k |
Turnover < £90k |
Turnover ≥ £90k |
Turnover < £90k |
|
Categories for quarterly updates |
Categories in section 1 of Making Tax Digital for Income Tax: update notice - GOV.UK. |
Simpler/short-form categorisation2 Expenses can come under one category of total expenses. |
Categories in section 2.1 of Making Tax Digital for Income Tax: update notice - GOV.UK. |
Simpler/short-form categorisation2 Expenses can come under one category of total expenses*. *Except for 'residential finance costs', which must be categorised separately. |
Categories in section 2.2 of Making Tax Digital for Income Tax: update notice - GOV.UK. |
Simpler/short-form categorisation2 Expenses can come under one category of total expenses.* *Except for 'residential finance costs', which must be categorised separately. |
1.Exceptions to the requirement to digitally record transactions individually:
Retail sales
If you make retail sales, HMRC allows you to keep digital records of daily gross takings (DGT) rather than individual sales (according to section 3 of Making Tax Digital for Income Tax: digital record-keeping notice).
Share of income and expenses from jointly let properties
According to the section 'Specific record keeping requirements' in Create digital records - GOV.UK; you can:
•create a single digital record for each category of property income that you receive in an quarterly update period
•create a single digital record for each category of property expense that you incur in a tax year
This means you only need to record one transaction each quarter for the total amount of each applicable income category, and one transaction each tax year for the total amount of each applicable expenses category.
Purchases from a supplier statement
Although there is an exemption in MTD for VAT that allows you to keep digital records of summary totals (by each VAT rate) of purchases from a supplier statement rather than individual invoices, HMRC guidance does not mention if a similar exemption exists for income tax purposes. This topic has been discussed in the an ICAEW webinar in the section 'Digital record keeping', which suggests that there is potentially an exemption.
2.Simpler/short-form categorisation
If turnover for the income type being submitted (self-employment, UK property or foreign property) is (or expected to be) less than £90,000 for the tax year being reported, you are permitted to submit a short-form quarterly update, which simplifies the categories of expenses to a single category of 'total expenses' (except for residential finance costs for property, which must be categorised separately as 'residential finance costs').
If you are not sure if you will come under the turnover threshold, you should use the full-form quarterly update. For further details, see the section 'Specific record keeping requirements' in Create digital records - GOV.UK.
