Making Tax Digital · Sole traders
Handling cash payments in a digital tax system
ONLY£15A MONTHMaking Tax Digital does not make cash illegal.
Making Tax Digital does not make cash illegal. It requires the relevant business records to be digital. A cash customer still pays for a real sale, and that sale needs recording even if the money never reaches a bank account.
Record receipt before banking or spending
Under the cash basis, record business money when received using a consistent permitted approach. HMRC's cash-basis guidance covers cash, card, cheque and other forms of payment.
A cashbook should show receipts, business cash expenses, drawings and transfers to the bank. Keep a clear date, amount and description, with any additional detail needed to understand the transaction. Do not invent a universal requirement to send every customer's identity to HMRC in a quarterly summary.
Check the cash on hand
Use an opening balance plus receipts, less payments and transfers, to calculate the expected closing cash. Compare it with the cash actually held and investigate differences.
Small amounts still matter. Spending takings on supplies before banking them does not justify reporting only the amount deposited. Retain the purchase evidence and record the receipt and expense separately.
Worked example: a day's cash movement
Opening cash is £50. Customer receipts are £300. The owner spends £40 on eligible supplies, takes £60 drawings and banks £200. Expected closing cash is £50 + £300 − £40 − £60 − £200 = £50.
Turnover is £300, not the £200 banked. The £40 may be an expense; the £60 drawings are not. Banking the cash must not create another £200 sale.
Reconcile receipts, not just bank payouts
A bank deposit is not always the original sale. A platform, card processor or agent may deduct fees before sending you the balance. Keep the statement showing the gross amount, deductions, refunds and final payout, then explain the difference in your records.
Cash needs the same attention. Record customer cash when received under the cash basis, even if some of it is spent before the rest reaches the bank. Banking cash already recorded as a sale is a transfer between your cash and bank records, not another sale.
HMRC's record-keeping guidance covers income and business expenses. The useful practical test is whether another person could follow a payment from the original sale to the amount received without counting it twice.
Do not use bank feeds as a reason to ignore payment accounts, credit cards, cash or payments made personally for the business. List every place where business money passes, choose the source for each type of transaction and review transfers between those sources. This turns reconciliation into a repeatable check rather than a search through several unrelated statements.
Keep the evidence connected to the figures
Your digital record should explain the amount, date and nature of the transaction. Keep the invoice, receipt, statement or other evidence that supports it. A photograph can make a paper document easier to retain, but a folder of photographs alone does not create complete transaction records.
For sole traders, HMRC normally requires business records to be kept for at least five years after the relevant 31 January filing deadline. Keep them longer where the rules for a late return, enquiry or other circumstances require it. Check the record-retention guidance.
Make the records usable by your future self. Include a short explanation where a bank description is vague, retain the calculation behind a business-use split and make corrections traceable. For a missing receipt, try the supplier account, email confirmation or a replacement invoice before relying on incomplete evidence.
At review time, compare your records with the bank or payment account and investigate differences. Equal totals are useful, but two errors can cancel each other out. A sample of individual transactions can reveal a duplicated purchase or an omitted customer receipt that a totals-only check misses.
Where this fits into Making Tax Digital
For 2026/27, the first mandatory phase generally covers individuals whose combined qualifying self-employment and property income was more than £50,000 in 2024/25, subject to exemptions. Qualifying income normally means income before expenses. It is a different figure from taxable profit. Check the qualifying-income rules.
Once within MTD, keep the required digital records and send quarterly summaries for each relevant business. The summaries are cumulative from the start of the reporting year. They do not contain your entire personal tax position, and sending one does not itself create a quarterly tax-payment demand.
HMRC does not require accounting or tax adjustments before each quarterly update. Those adjustments and the other information needed for the annual return still have to be completed at the appropriate stage. Keep a review list so a matter deferred until year end is not forgotten. Read HMRC's quarterly-update guidance.
Software can organise the information, but the business facts remain essential. Review the figures you approve rather than assuming that a successful import has also settled every tax question.
Keep the routine simple
Record cash close to the event, retain receipts and check the balance regularly. Use the software's supported cash-record workflow or another compatible method. Review cash alongside bank feeds so a convenient electronic connection does not leave part of the business invisible.
Take the next step
Avona.app offers a self-service route from £15/month. Bring your records together, review the figures and choose a workflow that fits your business. For professional help, discuss the scope and total price of Avona Concierge, managed by chartered accountants, before choosing a service.