AI in accounting software – what it means for your tax records

If you use Xero, QuickBooks, Sage or FreeAgent to manage your books, artificial intelligence is already working inside your software – automatically categorising expenses, reconciling bank transactions and extracting data from receipts. Many business owners have no idea it’s happening. But with Making Tax Digital for Income Tax Self Assessment (MTD ITSA) arriving in April 2026, understanding what AI in accounting software is doing on your behalf has never been more important.

Here’s what you need to know.

What AI in accounting software actually does

The major cloud accounting platforms have all invested heavily in AI over the past two years, and their capabilities are now significant.

Xero: JAX (Just Ask Xero)

In September 2025, Xero launched JAX. The company describes it as an ‘AI financial superagent’ that learns how your business runs, automates routine tasks and delivers actionable insights. In practical terms, JAX can draft invoices, reconcile bank transactions, answer questions about your finances in plain English and even send payment reminders to clients. You can interact with it via the desktop app, on your phone or via WhatsApp and email.

Every categorisation trains the system. Xero says its AI reconciliation predictions already save mobile users 80% of the time spent on manual reconciliation – and JAX’s target is to handle more than 80% of bank statement lines automatically.

QuickBooks: Intuit AI Agents

Intuit has taken a similarly ambitious approach when it comes to AI in accounting software. In mid-2025, QuickBooks launched what it calls a “virtual team of AI agents” – software that doesn’t just respond to commands but takes initiative on your behalf. These can automatically create and send invoices, track and reconcile transactions, categorise expenses and follow up on unpaid bills, all without you lifting a finger.

Sage: Copilot

Sage has rolled out Sage Copilot to businesses across the UK. It can give insights on cash flow, predict which invoices are most likely to be paid late, and automatically draft email reminders to clients with overdue bills.

However, in January 2025, The Register reported that Sage’s Copilot was temporarily taken offline after a customer discovered that the software was displaying invoice data from other businesses alongside their own. In fairness, Sage pointed out that it was a minor issue affecting a small number of customers – and that it fixed the problem quickly.

FreeAgent

FreeAgent, which THP offers free to certain clients, uses AI-powered smart capture to extract data from receipts and invoices, reducing manual data entry.

So what does AI in accounting software have to do with Making Tax Digital?

AI in accounting software has more to do with Making Tax Digital than most people realise.

From 6th April 2026, MTD for Income Tax becomes mandatory for self-employed people and landlords with gross income above £50,000 (assessed on your 2024/25 tax return). The threshold drops to £30,000 from April 2027, and (almost certainly) to £20,000 from April 2028.

MTD requires you to:

• Keep digital records of all your self-employment or property income and expenses, using HMRC-recognised software.
• Submit four quarterly updates to HMRC each year (due on 7th August, 7th November, 7th February and 7th May).
• File a final declaration by 31st January after the end of the tax year.

The HMRC software finder lists all recognised MTD-compatible products. Xero, FreeAgent, QuickBooks and Sage are all on the list. You can also use something called bridging software if you want to keep records in a spreadsheet – though most accountants will steer clients towards full cloud accounting packages (we certainly do – using software like FreeAgent or Xero will make your life so much easier).

The problem AI creates – and the responsibility it doesn’t remove

Here is the problem that AI doesn’t solve: when AI in accounting software automatically categorises a transaction, who is responsible if it gets it wrong?

The answer, based on HMRC’s existing guidance on digital records, is you – the taxpayer – not the software. HMRC requires that your digital records accurately reflect your business income and expenses. If an AI agent miscategorised a personal expense as a business cost, or wrongly treated a capital item as day-to-day revenue, the quarterly update submitted to HMRC would contain an error.

In other words, AI can automate accounting. It cannot take legal responsibility for your tax records. That remains yours.

Under the annual Self Assessment system, you had up to 10 months after the tax year ended to review and correct your figures before submitting. Under MTD, you are submitting cumulative quarterly updates throughout the year. The window to catch AI errors before HMRC sees them is considerably shorter.

There’s another point worth making. MTD requires that all transfers of data between software components are made using ‘digital links’. In other words, there can be no manual copying or re-keying of figures between systems. This means the AI categorisation happening inside your software effectively becomes part of your official record-keeping chain. If it went wrong, that error flows directly into your quarterly submission.

What about your original records?

AI software that extracts data from a receipt and pushes it to your accounting system does not replace the need to keep the underlying document. HMRC requires self-employed people to retain business records for at least five years after the 31st January submission deadline of the relevant tax year. For the 2024/25 tax return, for example, you need to keep records until at least 31st January 2031.

This applies whether a human filed the receipt or an AI scanned it. If HMRC opens an enquiry into your affairs, they can ask to see the original documents – and ‘the software handled it’ is not an acceptable response if they find AI-generated errors.

What should you do before April 2026?

There are four practical steps worth taking now:

1. Check whether you’re in scope. If your gross self-employment or property income exceeded £50,000 in 2024/25 – before expenses – you need to be ready for MTD from 6th April 2026. Your 2024/25 Self Assessment return (due by 31st January 2026) is the one HMRC will use to assess this.
2. Choose or review your software. If you’re not already using cloud accounting software, now is the time to start. Use HMRC’s software finder to identify recognised options, and speak to your accountant before deciding – they will have a preferred platform and can ensure it’s correctly configured. (At THP we generally recommend FreeAgent for smaller businesses and Xero for larger ones, but please do talk to us).
3. Don’t assume AI-generated records are correct. Log in to your accounting software and review how it has been categorising your transactions. In particular, check for expenses that look personal rather than business-related, and for any items that should be treated as capital expenditure rather than revenue costs. (If you are unsure, talk to your accountant).
4. Keep your original documents. Make sure you are retaining digital copies of invoices, receipts and bank statements – not just relying on what your software has captured. A good accounting system will include document storage, but you should check what your subscription actually includes.

The bottom line about AI in accounting software

AI in accounting software is genuinely useful. It saves time, reduces manual errors, and will make the quarterly reporting requirements of MTD considerably less burdensome for most businesses. But useful and infallible are not the same thing. The legal responsibility for your tax records has not been automated away – it still sits with you.

If you’re unsure whether you’re in scope for MTD, need help choosing the right software, or want someone to review the accuracy of your digital records before quarterly submissions begin, speak to one of our Making Tax Digital accountants here at THP. If you are (or become) one of our clients, we can make sure you’re set up correctly – and that what the AI in your cloud accounting software is doing on your behalf actually matches what HMRC expects to see.