Cash basis

Overview

1. Overview

‘Cash basis’ is a way to work out your income and expenses for your Self Assessment tax return, if you’re a sole trader or partner.

Why use cash basis

If you run a small business, cash basis accounting may suit you better than traditional accounting.

This is because you only need to declare money when it comes in and out of your business. At the end of the tax year, you won’t have to pay Income Tax on money you didn’t receive in your accounting period.

When cash basis might not suit your business

Cash basis probably won’t suit you if you:

  • want to claim interest or bank charges of more than £500 as an expense
  • run a business that’s more complex, eg you have high levels of stock
  • need to get finance for your business – a bank could ask to see accounts drawn up using traditional accounting to see what you owe and are due before agreeing a loan
  • have losses that you want to offset against other taxable income (‘sideways loss relief’)

Talk to a tax professional (eg an accountant) or legal adviser if you need help.

Find out if you’re eligible to use cash basis.

Who can use cash basis

2. Who can use cash basis

You can use cash basis if you:

  • run a small self-employed business, eg sole trader or partnership
  • have an income of £83,000 or less a year

If you have more than one business, you must use cash basis for all your businesses. The combined turnover from your businesses must be less than £83,000.

If you use cash basis and your business grows during the tax year

You can stay in the scheme up to a total business income of £166,000 per year. Above that, you’ll need to use traditional accounting for your next tax return.

Who can’t use the scheme

Limited companies and limited liability partnerships can’t use cash basis.

There are also some specific types of businesses that can’t use the scheme:

  • Lloyd’s underwriters
  • farming businesses with a current herd basis election
  • farming and creative businesses with a section 221 ITTOIA profit averaging election
  • businesses that have claimed business premises renovation allowance
  • businesses that carry on a mineral extraction trade
  • businesses that have claimed research and development allowance
  • dealers in securities
  • relief for mineral royalties
  • lease premiums
  • ministers of religion
  • pool betting duty
  • intermediaries treated as making employment payments
  • managed service companies
  • waste disposal
  • cemeteries and crematoria

If you can’t use cash basis, you’ll need to use traditional accounting to work out your taxable profits.

Getting started

3. Getting started

At the end of the tax year, work out your taxable profit from your cash basis income and expenses records.

Tick the cash basis box on the form when you send your return.

You can use cash basis for the 2013 to 2014 tax year onwards. If you’re sending a late tax return for tax years before this, you’ll need to use traditional accounting when working out your accounts.

Changing from traditional accounting to cash basis

Existing businesses using traditional accounting might have to make some adjustments when they switch to cash basis.

Talk to a tax professional (eg an accountant) or legal adviser if you need help.

How to record income and expenses

4. How to record income and expenses

You must keep records of all business income and expenses to work out your profit for your tax return.

Income

With cash basis, only record income you actually received in a tax year. Don’t count any money you’re owed but haven’t yet received.

ExampleYou invoiced someone on 15 March 2014 but didn’t receive the money until 30 April 2014. Don’t record this income for your 2013 to 2014 tax return, but instead for 2014 to 2015.

You can choose how you record when money is received or paid (eg the date the money enters your account or the date a cheque is written) but you must use the same method each tax year.

All payments count – cash, card, cheque, payment in kind or any other method.

Expenses

Expenses are business costs you can deduct from your income to calculate your taxable profit. In practice, this means your allowable expenses reduce your Income Tax.

Only count the expenses you’ve actually paid. Money you owe isn’t counted until you pay it.

Examples of allowable business expenses if you’re using cash basis are:

  • day to day running costs, eg electricity, fuel
  • admin costs, eg stationery
  • things you use in your business, eg machinery, computers, vans
  • interest and charges up to £500, eg interest on bank overdrafts
  • buying goods for resale

You can check what else counts as an allowable expense.

For the 2013 to 2014 tax year onwards you can also choose to use the simplified expenses scheme instead of calculating expenses for:

  • running a vehicle
  • working from home
  • making adjustments for living on your business premises

Cars and other equipment

If you buy a car for your business, you can claim the purchase as a capital allowance (but only if you’re not using simplified expenses to work out your business expenses for that vehicle).

Unlike traditional accounting, you claim other equipment you buy to keep and use in your business as a normal allowable business expense rather than as a capital allowance.

If you’re currently claiming capital allowances and want to switch to cash basis, HM Revenue and Customs (HMRC) have guidance on the changes you need to make.

Keep your records

You don’t need to send your records to HM Revenue and Customs (HMRC) when you send in your tax return but you need to keep them in case they ask to check them.

VAT registered businesses

5. VAT registered businesses

You can start to use cash basis if you’re VAT registered as long as your income is £83,000 or less during the tax year.

You can record your business income and expenses either excluding or including VAT. However, you must treat income and expenses the same way.

If you choose to include VAT, you have to record:

  • VAT payments you make to HM Revenue and Customs (HMRC) as expenses
  • VAT repayments you receive from HMRC as income

Last updated: 5 December 2016

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