Who can use cash basis

You can use cash basis if you: run a small self-employed business, for example sole trader or partnership have a turnover of £150,000 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 £150,000. From 6 April 2024, cash basis will become the default method of accounting . You must opt out if you want to use traditional accounting or cannot use cash basis accounting. If you use cash basis and your business grows during the tax year You can stay in the scheme up to a total business turnover of £300,000 per year. Above that, you’ll need to use traditional accounting for your next tax return. Who cannot use the scheme Limited companies and limited liability partnerships cannot use cash basis. There are also some specific types of businesses that cannot 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 cannot use cash basis, you’ll need to use traditional accounting to work out your taxable profits.

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. From 6 April 2024, cash basis will become the default method of accounting . You must opt out if you want to use traditional accounting or cannot use cash basis accounting. Talk to a tax professional (such as an accountant) or legal adviser if you need help.

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. Do not count any money you’re owed but have not yet received. Example You invoiced someone on 15 March 2023 but did not receive the money until 30 April 2023. Do not record this income for your 2022 to 2023 tax return, but instead for 2023 to 2024. You can choose how you record when money is received or paid (for example 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, such as electricity, fuel admin costs, for example stationery training costs to help you run your business things you use in your business, such as machinery, computers, vans interest and charges up to £500, for example 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 do not need to send your records to HMRC when you send in your tax return but you must keep them in case HMRC ask to check your records .

VAT registered businesses

You can start to use cash basis if you’re VAT registered as long as your income is £150,000 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 From 6 April 2024, cash basis will become the default method of accounting . You must opt out if you want to use traditional accounting or cannot use cash basis accounting.

Cash basis changes from the 2024 to 2025 tax year

If you’re a sole trader or partner, cash basis is the default way to work out your income and expenses when you file your Self Assessment tax return for the 2024 to 2025 tax year onwards. From 6 April 2024, you will need to start keeping records for the 2024 to 2025 tax year using cash basis, unless you either: choose to use traditional accounting cannot use cash basis Businesses that cannot use cash basis need to use traditional accounting. Other changes to the cash basis include: the £150,000 and £300,000 turnover thresholds have been removed the £500 limit on interest deductions has been removed the restriction on offsetting losses against other taxable income has been removed you can now use cash basis or traditional accounting for each of your businesses, if you have more than one business If you want to use traditional accounting or cannot use cash basis accounting You must opt out of cash basis. Tick the opt out box when you file your Self Assessment tax return. Talk to a tax professional (such as an accountant) or legal adviser if you need help.

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Cash basis

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.

From 6 April 2024, cash basis will become the default method of accounting. You must opt out if you want to use traditional accounting or cannot use cash basis accounting.

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 will only pay Income Tax on money received in your accounting period.

When cash basis might not suit your business

Cash basis probably will not 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, for example 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 (such as an accountant) or legal adviser if you need help.

View a printable version of the whole guide

Cash basis

Overview

Why use cash basis

When cash basis might not suit your business

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Cash basis

Overview

Why use cash basis

When cash basis might not suit your business

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