Bakers and cake designers: managing ingredient costs, wedding deposits, and MTD

A wedding cake might take three days to make and six months to plan. The couple pays a deposit in autumn, you order specialist decorations in spring, and the final balance arrives shortly before the wedding.

For the cake, those stages belong to one order. For tax, they may fall into different reporting periods or even different tax years.

Making Tax Digital for Income Tax is easier to manage when your records reflect what actually happened: the money received, the ingredients purchased, the equipment used and the household costs genuinely attributable to baking.

Check whether your baking business is within MTD

Sole traders must generally join when their qualifying income exceeds HMRC’s threshold, unless exempt. The tests are more than £50,000 in 2024–25 for entry on 6 April 2026, more than £30,000 in 2025–26 for 6 April 2027, and more than £20,000 in 2026–27 for 6 April 2028. See HMRC’s MTD start-date guidance.

Qualifying income is broadly your gross sole-trader and property income before expenses. Your ingredients, electricity and delivery costs reduce profit, but not the relevant gross income figure. Include other qualifying businesses and rental income when making the check. A PAYE job alongside your cake business does not count towards that threshold.

Home-based businesses follow the same entry rules as businesses with commercial premises. The test is not whether you have a shopfront, employees or a professional oven. A limited company or partnership needs a different assessment.

Record wedding deposits when the accounting rules require

Under cash basis, ordinary advance payments for your goods or services generally count when received. You do not wait until the wedding date to record a booking payment that is part of the cake price. HMRC explains when to record cash-basis receipts.

Cash basis is the standard method for eligible sole traders, although you can choose traditional accounting. Traditional accounts may defer advance income until earned, so it is important to know which method your accounts use.

Worked example: a cake delivered after 5 April

Imagine Hannah is a sole-trader baker using cash basis. She is not VAT registered. A couple orders a £1,200 cake for May 2027.

These illustrative figures show why the tax-year profit on a booking may differ from its overall margin. Hannah should also keep an order record showing £1,200 of total receipts and £220 of direct purchases, so she can assess the job commercially.

A refundable security amount for returning a cake stand is different from an ordinary advance payment towards the cake. Keep it separately identifiable and establish its treatment from the terms. If a booking is cancelled and you refund money, preserve the original payment and refund records rather than deleting the transaction history.

Capture the small purchases that add up

Section 34 of the Income Tax (Trading and Other Income) Act 2005 sets the business-purpose test for expenses. HMRC’s explanation of wholly and exclusively incurred costs applies just as much to a £4 cake board as a substantial wholesale order.

Typical business purchases include:

• Flour, butter, eggs, Belgian chocolate and sugar paste.
• Cake boards, structural dowels and specialist supports.
• Food-grade boxes, wrapping, ribbons and labels.
• Cleaning products used for commercial food preparation.
• Ingredients used for genuine business recipe development or samples.

Applying the rule means separating family shopping from business ingredients. If one supermarket receipt includes household food and baking supplies, identify the business lines. The supermarket name on a bank transaction cannot establish that the whole purchase is deductible.

For traditional accounting, stock on hand at the year end may need an adjustment. Cash basis generally follows payment for allowable stock purchases. HMRC’s reselling-goods guidance identifies stock and raw materials as relevant business costs.

Claim equipment through the appropriate route

A stand mixer, specialist cake tins and an airbrush kit can all support the business. Under cash basis, qualifying equipment bought outright is normally deducted as an expense when paid for. Under traditional accounting, equipment retained for use generally receives relief through capital allowances. HMRC explains equipment deductions.

There is no general need to describe a cash-basis mixer purchase as a capital-allowance claim. Nor should you deduct depreciation as well as claiming the purchase through the applicable tax route.

If the same mixer also makes family meals, establish a reasonable business-use share. Keep a short record of how you arrived at it. Oven servicing and repairs are usually running costs to the extent they relate to business use; a replacement oven, an extension or substantial kitchen alterations needs separate consideration.

The practical question is what you bought, how it is used and which accounting method applies, rather than whether the brand is KitchenAid or Kenwood.

Make a reasonable claim for household utilities

Commercial baking can use a significant amount of electricity, gas and water. You can claim an identifiable business share, but there is no automatic entitlement to a fixed percentage of your whole household bill. HMRC’s home-working expense guidance calls for a reasonable method.

For energy-intensive equipment, a usage calculation can be more useful than simply dividing the bill by the number of rooms. For example, 160 kWh attributable to business oven use at an illustrative 25p per kWh gives £40 of business electricity. Support the estimate with actual appliance use and your tariff; the example is not a prescribed allowance.

Consider other shared costs separately. Business use of kitchen lighting, hot water and cleaning may differ from oven use. A simple dated note explaining the basis is more useful than a percentage chosen without evidence.

Eligible home workers can alternatively consider HMRC’s simplified home-working rates: £10, £18 or £26 a month, depending on business hours. Compare the methods, and avoid claiming the same covered costs twice.

Keep quarterly updates tied to your records

MTD uses digital records and cumulative updates under the Income Tax (Digital Obligations) Regulations 2026 and HMRC’s reporting direction.

The standard 2026–27 deadlines are 7 August 2026, 7 November 2026, 7 February 2027 and 7 May 2027. Each update starts at 6 April and extends to the relevant period end. HMRC’s timetable also explains calendar periods.

Before each submission, check deposits, refunds, mixed shopping receipts, business utility claims and equipment purchases. Keep a separate list of future orders so receipts already taxed under cash basis are not mistaken for spare money available to spend.

The annual 2026–27 return is due by 31 January 2028. Quarterly updates do not change your tax payment dates. First-year quarterly penalty relief gives some breathing space, but records and updates are still required.

Give every order a clear financial record

Good baking accounts connect each payment to its order and each purchase to its business purpose. Once that habit is established, quarterly reporting becomes a review of information you already have.

Avona.app costs £15/month, with Avona AI helping categorise transactions for you to check. If you prefer managed support, Avona Concierge is managed by chartered accountants and starts from £60/month.

Explore Avona.app and choose the support that works around your baking schedule.