Making Tax Digital · Sole traders
Basis period reform and MTD: the tax year is not always your accounting year
ONLY£15A MONTHBasis period reform changes how relevant unincorporated businesses allocate profits to the tax year.
Basis period reform changes how relevant unincorporated businesses allocate profits to the tax year. It does not force every business to change its accounting year-end. MTD reporting adds a digital timetable, but the annual profit calculation still needs to handle any difference between accounting dates and tax-year dates.
Understand the tax-year basis
From 2024/25, relevant business profits are assessed on the tax-year basis. A business with accounts ending outside the period from 31 March to 5 April may need to apportion profits from two sets of accounts. HMRC explains the reform and reporting process.
Keeping a different accounting date remains possible. Moving the year-end may simplify some work, but the decision needs to consider the business and any consequences rather than being presented as compulsory.
Keep the transition history
The 2023/24 transition year involved transition profits and available overlap relief. Remaining transition profit can be spread under the rules through 2027/28. That means a later return may still need information from the transition calculation.
Where final accounts are unavailable by the return deadline, provisional figures and later amendments may be needed under the applicable process. A bank feed aligned to quarterly dates does not automatically resolve those annual accounting questions.
Worked example: a December year-end
A business keeps accounts to 31 December. Its 2026/27 tax calculation may need the relevant part of the accounts ending December 2026 and the relevant part of the next accounts to cover the tax year to April 2027.
The apportionment must use a reasonable, consistent method. Copying the whole December 2026 profit into the return without considering the tax-year basis can give the wrong period of profit.
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.
Treat a tax estimate as a forecast
A bookkeeping profit is not necessarily your final taxable income, and an estimated liability is not always the amount still to pay. Employment income, pensions, savings, reliefs, tax already deducted and payments on account can all affect the final position.
An estimate is most useful when you understand its coverage. Check whether it uses year-to-date figures or projects a full year, whether all income sources are included and whether adjustments are still outstanding. A strong summer followed by a quiet winter should not automatically be projected as twelve identical months.
HMRC explains that estimates after quarterly updates can be incomplete when other income is missing or accounting periods do not align with the tax year. Read the estimate guidance within quarterly reporting.
Use a reviewed forecast to inform a cash reserve, then compare it with actual HMRC liabilities and payment dates. If you transfer money into a tax savings account, that transfer is not a business expense. If an estimate changes sharply, investigate the records and assumptions before assuming that your tax position itself has changed by the same amount.
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.
Retain the accounting-date and transition schedule
Keep the year-end, apportionment method, overlap-relief history and remaining transition profit visible to your adviser. Confirm how the software supports the required annual adjustments. Quarterly reporting dates and annual taxable profit should be connected by a documented calculation.
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.