MTD for Income Tax: Five Record-Keeping Habits to Fix Before the February Update

Two quarters into Making Tax Digital for Income Tax, the novelty has worn off and the habits have set in. Sole traders and small partnerships above the £50,000 threshold have now sent HMRC cumulative figures for the periods ending 5 July and 5 October 2026, with the 7 November deadline behind them and the third update due on 7 February 2027.

That is enough distance to see where the process is quietly failing. The problems surfacing in 2026 are rarely dramatic. They are small, repeated and cumulative, and they usually announce themselves as a scramble in the final week of a quarter rather than as an error message. Below are the five we see most often, each with a fix that can be completed in an ordinary working afternoon.

Two quarters in: the pattern, not the panic

A quarterly update under MTD is not a tax return. It is a cumulative summary of income and expenses for the year to date, submitted four times, with the final declaration following by 31 January. Because each update restates the year so far, an error made in quarter one does not disappear; it is carried forward and repeated until someone corrects it.

That single feature explains most of the difficulty. Record-keeping that was adequate for an annual return, assembled once with hindsight and a shoebox, does not survive a process that asks for a figure every three months. The good news is that the required discipline is modest. What follows is not a compliance lecture; it is a description of what a workable routine looks like.

1. A bank feed nobody reconciles

Open banking connections are convenient and slightly fragile. Consent typically lapses after around 90 days, and when it does the feed often stops silently rather than announcing itself. The result is a quarter with a gap in the middle, into which someone later imports a statement by hand — and the overlapping transactions are counted twice.

Other variants are common: transfers between a current account and a savings pot recorded as income, supplier refunds treated as sales, and card payments to the owner logged as a business expense.

The fix. Diarise a 20-minute reconciliation on the first working day of each month, matching the software balance to the bank statement closing balance. Mark inter-account transfers as transfers, not income. Re-authorise the feed before it expires, and keep the re-consent date alongside other recurring renewals.

2. Manual rekeying passed off as a digital link

HMRC requires digital records and digital links between the point where a transaction is recorded and the point where it reaches the update. A spreadsheet is perfectly acceptable — but typing totals from one system into another is not a digital link. Neither is copying a column of figures and pasting it into a submission file. The link has to be a genuine transfer: an API connection, a direct import, or bridging software that pulls the data rather than receiving it by hand.

The fix. Decide once where the records live, then let that system submit. If a spreadsheet genuinely is the right tool, use bridging software that imports the file directly, and write down the monthly routine in three or four lines so it does not drift. A documented process survives a busy month; a remembered one does not.

3. One account for everything

Sole traders are not required to run a separate business bank account, and many do not. The consequence is a business record that also contains the weekly shop, school fees and a holiday deposit, all of which then need unpicking in the week before a deadline.

Private use of a vehicle, a room at home or a phone adds a second layer, because only the business proportion is allowable.

The fix. Open a second account, even a free one, and run all business income and spending through it. Where that is impractical, treat drawings as a category in their own right rather than as an unexplained expense, and set a private-use percentage for motoring and home costs once a year, applied consistently. Anything not wholly and exclusively for the trade should be visible as a decision, not buried in a miscellaneous line.

4. Categories that do not survive contact with the return

The quarterly update asks for totals that map to the return: turnover, and expenses split by type. It does not ask for capital purchases, which are dealt with through capital allowances on the final declaration, nor does it accept entertaining, client gifts or fines. A chart of accounts built for convenience rather than mapping tends to produce a lump of ambiguous items that then need reworking.

The fix. Build a one-page mapping sheet that links each software category to the corresponding return box, and keep a separate capital category for equipment, vehicles and substantial fit-out costs. Mark disallowable items as disallowable at the point of entry, while the reason is still fresh.

5. A quarter of work compressed into the final week

Because updates are cumulative, an error corrected late is an error repeated in every later submission. Late submissions attract points under the new penalty regime, and points accumulate quietly. But the more expensive problem is internal: figures produced in a rush cannot inform a pricing decision, a hire or a conversation with a lender.

The fix. Replace the deadline sprint with a short monthly close — 30 minutes to categorise, reconcile and check the year-to-date profit figure against expectations. If something looks wrong, correct it in the next cumulative update rather than attempting to amend a submitted one. And keep the underlying evidence: records need to be retained for at least five years after the 31 January submission deadline for the relevant year.

The afternoon that pays for itself

Most of the five fixes above can be closed out in a single sitting: re-authorise the feed, confirm the digital link, open the second account, build the mapping sheet, and put three recurring appointments in the calendar. What changes afterwards is not the tax bill so much as the quality of the number you are looking at. A sole trader who knows the year-to-date margin in November can make a decision about January.

This article is general information rather than tax advice. Where a business has multiple income streams, property income or a partnership with changing profit shares, it is worth confirming the treatment with an accountant before the 7 February deadline rather than after it.