Why This Guide Exists

Most MTD guides tell you to "keep good records." That is not helpful when HMRC opens a compliance check and asks you to prove that £4,200 in expenses was genuinely business-related. This guide goes line by line through what sole traders actually report in a quarterly update - income, expenses, and allowances - and tells you exactly what evidence to keep for each category. Not vague advice. Specific documents.

If you file without an accountant, this is the guide you need before HMRC ever asks a question - not after.

Note: This guide covers sole traders only. If you also have rental income, the record-keeping rules for your property side are different. See our Mixed Income MTD guide for how expenses and income split across the two income types.

What HMRC Is Actually Looking For

When HMRC opens a compliance check after an MTD filing, they are not just checking that your numbers add up. They want to see that every figure in your quarterly update has a paper trail behind it. That means:

HMRC can open an enquiry up to 12 months after your final declaration, or up to six years if they suspect something is wrong. You need to keep records for at least five years after the 31 January filing deadline for the relevant tax year. For more on how long to keep things, read our retention rules guide.

The good news is that if you keep the right documents from the start, a compliance check becomes straightforward rather than stressful. See our guide to what a compliance enquiry actually involves for context.

Part 1: Income Records

Turnover from Sales or Services

In your quarterly update, you report your total business income for the period. HMRC expects you to be able to prove every pound of that figure.

The core documents you need are:

The key rule is this: your reported income figure should match the total of your invoices or transaction records, which should match the money that arrived in your bank. If those three figures do not match, you need to explain why - for example, a client who paid late, or a payment that arrived in the next quarter.

Cash Income

Cash payments are not exempt from MTD. If a customer pays you in cash, you still need to report it and you still need a record. Keep a simple cash book - a spreadsheet is fine - logging the date, the amount, who it was from, and what it was for. If you issue receipts for cash jobs, keep a copy of those too.

Warning: Cash income that does not appear in your bank statements but does appear in your quarterly update can look suspicious in a compliance check. Be consistent. If you take cash out before banking it, note this clearly in your cash book so the trail makes sense.

Income Paid to a Personal Account

Many sole traders, especially when starting out, receive business income into a personal bank account. HMRC does not require you to have a separate business account (though it helps). If business income goes into a personal account, you will need to identify and separate those transactions clearly. Highlight them, export them to a spreadsheet, or keep a running log. Mixed personal and business transactions on the same statement make a compliance check much harder to navigate.

Part 2: Expense Records by Category

MTD quarterly updates use HMRC's standard expense categories. Here is what you need to keep for each one. For a broader look at what expenses are actually allowable, see our guide to self-employed business expenses in MTD.

Office Costs

This covers stationery, printer ink, postage, and general office supplies.

Travel Costs

Travel is one of the most scrutinised expense categories because it is easy to overclaim.

Your evidence should show that each journey or stay was for business purposes. It helps to add a brief note at the time - for example, "travel to client meeting, Manchester, 3 June" - so you can explain it months later if needed.

Mileage and Vehicle Costs (Simplified Expenses)

Most sole traders use the HMRC simplified mileage rate (45p per mile for the first 10,000 miles, 25p thereafter) rather than claiming actual vehicle costs. If you use simplified expenses, you need a mileage log.

Your mileage log should record, for each business journey:

A spreadsheet works well for this. Apps that track mileage via GPS also work. What HMRC will not accept is a rough estimate added up at the end of the year. See our guide to mileage allowances in MTD for full detail on the rates.

If you claim actual vehicle costs instead of the mileage rate, you need fuel receipts, insurance documents, service and repair invoices, and your MOT certificate. You also need to work out the business-use percentage of the vehicle if it is also used personally. See our mixed-use expenses guide for how that works.

Clothing

Only specialist clothing counts - uniforms, protective gear, or clothing that you could not reasonably wear outside work (such as a branded uniform or safety boots). You cannot claim everyday clothes even if you wear them for work.

Staff Costs

If you pay subcontractors or casual workers, keep:

Things You Buy to Sell On (Cost of Goods Sold)

If you buy stock or materials as part of your trade, you need supplier invoices or receipts for every purchase. Keep delivery notes where they are provided. Your opening and closing stock figures also need a record - a simple stocktake list with quantities and values is sufficient.

Financial Costs

Bank charges, payment processing fees, and interest on business loans can be claimed. Keep:

Professional and Legal Fees

Accountant fees, bookkeeper fees, software subscriptions, legal advice directly related to the business - all of these are allowable. Keep:

Phone and Internet

If your phone and broadband are used for both business and personal purposes, you can only claim the business proportion. Keep:

If you have a separate phone contract used exclusively for business, the full cost is allowable and you just need the bills.

Use of Home as Office

Two approaches are available. The simplified flat-rate method (£10-£26 per month depending on hours worked at home) requires no receipts but you do need a record of the hours you work from home each month. The actual-cost method requires utility bills, a floor plan or calculation showing the proportion of your home used for work, and working showing how you arrived at the figure.

Keep a simple log if you use the flat-rate method. Note the month and how many hours you worked from home. See our DIY expense evidence guide for more on this.

Advertising and Marketing

Website costs, social media advertising, printed materials, directory listings - keep invoices or receipts for all of these. For online advertising platforms, download your billing summaries monthly.

Part 3: Records for Allowances and Adjustments

Annual Investment Allowance and Capital Allowances

Capital allowances apply to equipment, tools, computers, and other assets you buy for your business (not running costs - those are expenses). You report capital allowances in your final declaration rather than your quarterly updates, but you need to keep the records from the point of purchase.

For each item you intend to claim as a capital allowance, keep:

Trading Allowance

The trading allowance lets sole traders with gross income below £1,000 in a tax year pay no tax on that income, and claim no expenses against it. If your income is above £1,000, you cannot use the trading allowance and must claim actual expenses instead.

If you use the trading allowance, you still need records of your income - the allowance does not remove the need to report income, just to claim expenses. Read our trading allowance guide for sole traders for the full picture.

Simplified Expenses (Flat Rates)

Beyond mileage and use of home, some sole traders use flat-rate simplified expenses for vehicles where they live in their business premises (for example, a bed and breakfast owner). Keep a record of which method you are using and when you started using it, as switching methods mid-year has implications.

Practical Tips for Keeping Evidence

Go Digital From Day One

HMRC does not require digital records under MTD in the same granular way it does for VAT, but keeping digital copies of everything is strongly advisable. Paper receipts fade and get lost. Photograph receipts on the day with your phone. Save invoice PDFs to a dedicated folder. A simple folder structure - organised by quarter and then by expense category - takes minutes to set up and saves hours if HMRC ever asks questions.

For a full system, see our guide to setting up a record-keeping system for MTD.

Keep Business and Personal Separate

The single most practical step you can take is to use a separate bank account for business transactions. It does not need to be a formal business account - a second personal account works. This makes it immediately clear which transactions are business-related and removes the need to trawl through months of mixed statements.

Note the Business Purpose at the Time

When you make a business purchase, write a brief note immediately - either on the receipt, in your records app, or in a spreadsheet. "Lunch with a client" is not enough detail. "Lunch with Sarah Jones, discussing website project, 14 June" is. The detail matters if HMRC asks six months later.

Reconcile Every Quarter Before You File

Before submitting each quarterly update, check that your total income figure matches your invoices and bank statements, and that every expense entry has a corresponding receipt or document. This is your last chance to spot a gap before the numbers go to HMRC. Our bank reconciliation guide walks through this process step by step.

Note: You do not send your receipts or invoices to HMRC when you file a quarterly update. You just submit the totals. But HMRC can ask to see the supporting documents at any point afterwards - which is why keeping them is essential. For more on what a compliance check looks like, see our compliance check records guide.

What Happens If You Cannot Produce the Evidence

If HMRC opens a compliance check and you cannot support a figure in your quarterly update, the outcome is usually one of two things: HMRC disallows the expense and adjusts your tax bill upwards, or - if the gap is large enough or the pattern looks intentional - they issue a penalty on top of the additional tax. Interest also applies on any underpaid tax.

Missing one small receipt is unlikely to cause serious problems. A pattern of uncorroborated expenses or income that cannot be traced is a different matter. The safest position is to be able to produce a document for every line of every quarterly update, every time.

For a broader look at what HMRC can and cannot do after you file, see our guide to preparing records for HMRC enquiries after filing.

Putting It All Together

Keeping MTD records is not complicated, but it does require consistency. The sole traders who end up in difficulty are usually those who file their quarterly updates based on estimates and paper bags of receipts, intending to sort it out later. Later never comes until HMRC asks. If you set up a simple system now - digital copies of everything, organised by quarter and category, with brief notes on business purpose - you will have everything you need whether or not HMRC ever comes knocking.

Keep Your Records Tidy From the Start

AffordableMTD makes it straightforward to import your expenses, categorise your income, and submit quarterly updates directly to HMRC - with your records organised and ready if you ever need them. Try it free, no commitment.

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