Making Tax Digital · Sole traders
Recording customer refunds and payment-provider chargebacks for MTD
ONLY£15A MONTHRefunds and chargebacks explain why sales reports and bank payouts can differ.
Refunds and chargebacks explain why sales reports and bank payouts can differ. They should remain visible in the records rather than being hidden inside a net deposit. The aim is to show the original sale, any reversal and the separate fees without counting a deduction twice.
Follow the transaction history
Keep the original order reference, payment-provider statement and evidence of the refund or dispute. Identify whether money was actually returned, temporarily withheld or finally lost after a chargeback decision. These events do not necessarily have the same accounting effect.
Under cash basis, the relevant receipts and payments follow that basis. Under traditional accounting, the timing may depend on accruals and the circumstances of the reversal. Use the software's supported credit or refund process and preserve the link to the original transaction.
Keep fees separate from the reversal
A provider may retain its original processing fee and charge an additional dispute fee. Those are distinct from the customer refund. The provider statement should explain how they affect the settlement.
Where VAT applies, check the VAT treatment and any credit-note requirements separately. MTD Income Tax records do not settle every VAT question, and a chargeback notification is not necessarily the same document as a customer credit note.
Worked example: a sale fully refunded
A customer pays £100 and the provider retains a £2.50 fee, transferring £97.50. The records explain £100 sales and £2.50 processing costs.
The business later refunds the full £100 and the provider keeps its fee. Across the completed transaction, the sale and refund offset, leaving the £2.50 cost. Recording only the original £97.50 as sales and then deducting the fee again would distort the figures.
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.
A review that checks more than the total
Start with coverage: the correct person, business and period, plus all relevant accounts and cash records. Then look at completeness. A feed can be connected today while still missing an earlier week. Confirm the earliest and latest transactions against the source.
Next, inspect unusual items. Large transfers, loan receipts, refunds, net settlements and private purchases often need more context than a bank description provides. Check for duplicate imports where a statement overlaps a live feed. An automatic warning is useful evidence to investigate, not proof that the entry must be removed.
Finally, review category totals. A category unexpectedly showing zero, a large increase or a negative amount deserves an explanation. You do not have to make every annual tax adjustment at this stage, but you should understand the records behind the summary you approve.
HMRC explains what quarterly updates contain. Keep the approved version and the resulting acknowledgement together. If something later changes, correct the source record and use the software's supported update process so you can explain which figures are current.
Reconcile the provider account
Check opening balance, gross receipts, refunds, fees, reserves and payouts against the closing balance. Keep unresolved disputes on a review list with their current status. An amount temporarily held by a provider should not disappear from the records merely because it has not reached the bank.
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.