AI bookkeeping tools and Making Tax Digital

AI bookkeeping tools can be used under Making Tax Digital as long as the records end up in software that keeps the required digital records and the data moves to HMRC through digital links, not copy and paste. The tool takes on none of the legal responsibility. HMRC says it is the taxpayer’s responsibility to check digital records are accurate, and a miscoded transaction that reaches a return is the taxpayer’s inaccuracy.

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Who has to follow Making Tax Digital?

For VAT, HMRC said in March 2022 that all VAT registered businesses must use Making Tax Digital for their first VAT return starting on or after 1 April 2022, unless exempt. VAT Notice 700/22 requires them to keep records digitally and file VAT returns using software.

For Income Tax, sole traders and landlords join in stages based on qualifying income, which is total self employment and property turnover before expenses:

over £50,000 on the 2024 to 2025 return: from 6 April 2026
over £30,000 on the 2025 to 2026 return: from 6 April 2027
over £20,000 on the 2026 to 2027 return: from 6 April 2028

More detail is in MTD Income Tax thresholds.

What digital records does MTD require?

For VAT, section 3.3 of VAT Notice 700/22 lists the business name, principal place of business, VAT number and any VAT schemes used, plus, for each supply made, the time of supply, the value excluding VAT and the rate of VAT, and, for each supply received, the time of supply, the value and the input tax claimed.

For Income Tax, each digital record must show the amount, the date the income was received or the expense incurred, and the category, using the same categories as Self Assessment. Sole traders with turnover under £90,000 can simply record whether each transaction is income or an expense. The duty comes from regulation 15 of the Income Tax (Digital Obligations) Regulations 2026 (SI 2026/336) and an HMRC direction. HMRC also says you still need to keep original records or supporting documents, or copies of them. See MTD digital records.

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Can an AI tool read receipts and categorise transactions?

Nothing in the guidance prevents it, and the VAT notice already anticipates automated capture. Its examples treat software that scans invoices received and puts the information in its ledger as compliant, and say that if the image keeps all the VAT detail the original invoice need not be kept unless needed for another purpose. Manual entry of invoice data into the software is also accepted.

For Income Tax, HMRC notes that bank feeds may not show every transaction in full and that you may need to add detail such as the Self Assessment category. That is exactly the step AI categorisation tools perform, so the question is not whether the tool is allowed but whether its output is checked. For receipt apps more generally, see receipt capture apps in practice.

What are the digital links rules?

VAT Notice 700/22 defines a digital link as a transfer or exchange of data made, or capable of being made, electronically. Linked spreadsheet cells, emailing a spreadsheet, moving files on a pen drive, XML or CSV import and export, and API transfers all count. HMRC does not accept cut and paste or copy and paste as a digital link, and manual transfer of data between programs is not acceptable.

For Income Tax, HMRC says record keeping software and the software used to make submissions must be digitally linked, and that once a record has been sent in a quarterly update it must not be moved manually within the record keeping software or to other software. Spreadsheets are allowed, but you need bridging software to link them to HMRC.

The common AI risk here is a person pasting a chatbot’s categorised list into a spreadsheet or bookkeeping package. That copy and paste step breaks the chain. An AI feature built into the bookkeeping software, or one that exports by file or API, does not. More on this in MTD digital links.

Point	MTD for VAT	MTD for Income Tax
Who	All VAT registered businesses unless exempt	Sole traders and landlords over the qualifying income threshold
Start	First return period starting on or after 1 April 2022	6 April 2026, 2027 or 2028 by income
Record per item	Time of supply, value, VAT rate or input tax	Amount, date, category
Copy and paste	Not a digital link	Records sent in an update must not be moved manually
Software	Functional compatible software	Software on HMRC’s list or bridging software

Does HMRC approve AI bookkeeping software?

No. HMRC says it does not recommend any product or software provider, though software it lists has passed its recognition process, and it offers a software finder tool. For Income Tax the software must let you create, store and correct digital records, send quarterly updates, which are not tax returns, and submit the tax return by 31 January after the tax year. An AI tool that sits outside that software is a helper, not the record. See choosing MTD software.

Before uploading bank statements or client files to any AI service, check what it does with the data. See AI tools and client data.

Who is responsible when an AI tool gets it wrong?

The taxpayer. HMRC’s guidance on digital records says it is your responsibility to check that your digital records are accurate before you send a quarterly update. Its compliance handbook says a person remains liable to a penalty for a careless inaccuracy whether the inaccuracy was put in by them or by a third party, unless they took reasonable care themselves. Carelessness can include a poor choice of agent or failing to check the agent’s work. Software is not mentioned specifically, but the same logic applies to relying on a tool without checking it.

HMRC’s examples of careless inaccuracy include having no structured system for making sure records are accurate, wrongly claiming all the input tax on a car, and systems that are not adequate to produce correct figures. On the other side, HMRC accepts that a business with proper systems that are followed may still have small processing or coding errors that do not show a lack of reasonable care, where the effect is not significant against the overall liability. Acting on advice from a competent adviser that proves wrong can also be reasonable care. See relying on an adviser and reasonable care.

Careless inaccuracy penalties range from 0% to 30% of the extra tax for unprompted disclosure and 15% to 30% when prompted.

How are errors from an AI tool corrected?

HMRC says that if you find an error or missing information in your digital records you should correct it as soon as possible. After the fourth quarterly update you can correct the record and resend that update, or adjust the category total. There are no penalties for missing a quarterly update deadline for the 2026 to 2027 tax year. After that, late updates earn points, and at the threshold of 4 points a £200 penalty applies, with a further £200 for each later missed deadline. See MTD quarterly update errors.

Illustration only. A sole trader with £60,000 turnover connects an AI categorisation tool to his bank feed. It codes £1,200 of personal online shopping as office costs, and nobody reviews it before the tax return is filed. At 40% income tax the extra tax is £480. If HMRC finds it and treats it as careless with prompted disclosure, the penalty is between £72 and £144. Had a monthly review caught it before filing, there would have been nothing to disclose.

Frequently asked questions

Is copying AI output into my bookkeeping software allowed?

Typing source data such as invoice values into the software is accepted. Copying and pasting data between programs within the record keeping chain is not a digital link for VAT, so use built in AI features or file and API transfers instead.

Do I still need receipts if the AI app has read them?

For VAT, if the scanned image keeps all the VAT detail the original need not be kept unless needed for another purpose. For Income Tax HMRC says you still need original records or supporting documents, or copies.

Is an AI tool’s miscoding a reasonable excuse?

Not by itself. HMRC says the taxpayer must check that digital records are accurate, so the question is whether reasonable care was taken in using and checking the tool.

Are quarterly updates tax returns?

No. HMRC describes quarterly updates as summaries that are not tax returns. The final tax return is still due by 31 January after the tax year.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 6 November 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.