How to Keep Records in Your Business: A Guide to Making Tax Digital (MTD) Record-Keeping

The Shift to Digital Record-Keeping

The world is rapidly evolving towards a digital-first approach, and businesses must adapt to stay compliant and efficient. The UK government’s Making Tax Digital (MTD) initiative is a key driver of this change, requiring businesses to maintain digital records and submit tax returns electronically. Whether you are a sole trader, a limited company, or a partnership, adopting a structured record-keeping system is essential for financial clarity and legal compliance.

The record keeping spectrum

In business there is a record keeping spectrum. At one end, there is the perfect system where every transaction in your accounting software has a record assigned to it. At the other end, there is the shoebox under the bed, containing scrunched up receipts. How much time and money you want to spend on record keeping will determine where you end up on this spectrum.

From years of helping small businesses streamline their financial systems, this is our input. The end goal for every business is to be at the perfect end of the spectrum, but at the start of business, this can be expensive and time consuming. To avoid this, it’s usually best to be somewhere in the middle. An example would be uploading records to Xero files by using the Xero files email to upload electronic records and the Xero app to upload paper records. This way all your business records and accounting will be stored in one place, you do not spend hours assigning them to each transaction.

HMRC Requirements for Record-Keeping

HMRC mandates that businesses keep accurate financial records for a minimum of six years. These records must include:

• Income and sales

• Business expenses

• VAT records (if applicable)

• PAYE records (for employers)

• Bank statements

• Asset records

With MTD in effect for VAT and Income Tax Self-Assessment, businesses must store their records in digital format and use compatible software for submitting returns. This makes traditional paper-based record-keeping increasingly impractical and non-compliant.

Dedicated Business Bank Account

Many business owners operate through a personal bank account, this can cause confusion for both them and their accountant, leading to mistakes and higher accounting fees. Some banks have been known to close down an account if they suspect it is being used for business. You will also have more privacy, especially with MTD on the horizon.   

Using Accounting Software for Efficient Record-Keeping

Accounting software simplifies the record-keeping process by automating data entry, reconciliation, and reporting. One of the most popular choices among businesses is Xero. This cloud-based platform offers:

• Real-time financial tracking

• Bank feeds for automatic reconciliation

• VAT submissions directly to HMRC

• Multi-user access for collaboration with accountants

By integrating Xero with other digital tools, businesses can enhance efficiency and reduce manual data entry errors.

Record-Keeping Apps: Hubdoc and Dext

To further streamline digital record-keeping, apps like Hubdoc and Dext (formerly Receipt Bank) help automate document capture and data extraction. These apps allow businesses to:

• Scan and upload receipts, invoices, and bank statements

• Extract key financial information automatically

• Sync data with accounting software like Xero

• Reduce paperwork and save time

These tools ensure that businesses maintain an organised digital archive, making tax audits and financial reviews more manageable.

Summary

With HMRC’s shift towards Making Tax Digital, businesses must embrace digital record-keeping to remain compliant and efficient. Using accounting software like Xero, combined with record-keeping apps like Hubdoc and Dext, ensures optimal financial management. By maintaining digital records, businesses can improve accuracy, save time, and be better prepared for tax obligations. Now is the time to transition to a streamlined digital system and future-proof your business finances.