Making Tax Digital for Retail & Online Sellers

Making Tax Digital for Income Tax (MTD for ITSA) moves self-employed reporting online. It applies from 6 April 2026 to sole traders and landlords with qualifying income over £50,000, from April 2027 at £30,000, and from April 2028 at £20,000. Qualifying income means the gross value of everything you sell before you take off any expenses — not your profit. That catches a lot of people out: a trade turning over £60,000 and taking home £28,000 is in scope from April 2026, not 2028.

For a retailer the gap between turnover and profit is the widest of any sector, because most of what comes in goes straight back out on stock. A gift shop turning over £90,000 might make £14,000 after stock, rent and rates — yet it is the £90,000 that sets the MTD start date, so the shop is in the first phase from April 2026 while its owner still thinks of it as a tiny business. Work your date out from your total sales, not from your drawings or your profit.

In practice MTD means keeping digital records of your sales and costs, sending HMRC four quarterly updates, and making a final declaration after the tax year that replaces the Self Assessment return you file now. The habit it rewards is capturing each sale and each stock purchase as it happens, rather than reconstructing a year from payout statements in January.

The rule that catches retailers out is that stock is not an expense when you buy it — it becomes one only when it sells. Money spent on goods that are still on the shelf at the year end has not reduced your profit; it has simply changed from cash into stock, which is an asset. To measure a year properly you count what is left and value it at the lower of what it cost and what you could now sell it for.

This is where a seller who buys in bulk goes wrong. Spend £20,000 in March on stock for the spring and it feels like a £20,000 cost against the year just ending — but if £15,000 of it is unsold on 5 April, only £5,000 has actually reduced your profit. Treating the whole £20,000 as an expense understates your profit now and overstates it next year, and it is exactly the kind of swing that produces a tax bill nobody budgeted for.

Stock that will never sell at full price is a real cost, and the relief is real too. Goods damaged, gone out of season or written down to clear can be valued at what you can actually get for them rather than what you paid — but only if the write-down is recorded at the time. A vague year-end guess at “shrinkage” does not stand up; a dated note of what was binned or marked down does.

Retail is the one sector where VAT is genuinely not all-or-nothing, because the rate depends on the item. Books, newspapers, most food and children’s clothing are zero-rated; greeting cards, homeware, adult clothing and most gifts are standard-rated. A single shop can ring up both in the same transaction, which is why working out the VAT item by item is impractical for anyone with a busy till.

That is what the retail schemes are for. The Point of Sale scheme uses an EPOS system to record the VAT rate as each item scans; apportionment and direct-calculation schemes let a smaller shop estimate the split from purchases where the till cannot. Which suits you depends on your mix and your till, and choosing well is worth real money over a year.

The trap worth naming is the Flat Rate Scheme. It looks simple — pay HMRC a fixed percentage of your gross takings and forget the detail — but for a goods-heavy retailer buying stock at standard rate, the VAT you give up reclaiming on that stock usually outweighs the simplicity, and the limited-cost-trader rules can push your rate up. It suits a low-cost service far better than a shop. Model it against normal VAT before you opt in, not after.

Money reaches a modern seller in four or five different shapes, and the job is to record each one at the value the customer actually paid. Cash needs a daily takings record — the honest figure and the one an inspector can follow. Card settlements arrive net of the machine fee, marketplace payouts arrive net of commission, and a payment processor pays out its own timetable, often batching several days of sales into one deposit.

The mistake that costs sellers most is treating the payout as the sale. A £2,000 week on a marketplace that keeps 15% lands as £1,700, and a seller who books £1,700 has understated turnover by £300 a week — which drags their MTD and VAT thresholds down with it and quietly hides £15,600 of annual sales. Record the gross sale and the fee as two separate lines and both problems disappear.

Marketplaces add one more wrinkle. On many overseas and some UK sales the platform now collects VAT itself and remits it to HMRC, so the VAT on those transactions is not yours to account for even though the sale is still your turnover. Reconciling each platform’s payout report to your own sales record every month is the only way to keep that straight, and it is exactly what good software automates.

The change people fear is four tax returns a year. It is not that. A quarterly update is a summary of your sales and costs for the period, sent from your software — no tax calculation, no declaration, and nothing to pay on the strength of it. The tax is still settled once, after the year end, through a final declaration that replaces your Self Assessment return.

For a retailer the practical point is that the stock adjustment belongs at the year end, not in every quarter. The quarterly updates report the sales and purchases as they happen; the count of what is left on the shelf, and the matching of cost to sales, is done once when the final figures are prepared. Trying to value stock four times a year is effort the rules do not ask for.

With a bank feed running and your till or marketplace connected, most of the work is a review rather than data entry. We set that up, make sure the sales categories and VAT rates match how you actually sell, and keep the year-end stock and VAT position straight so the quarterly deadline is a short check rather than a lost day.