Cash basis

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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.

View a printable version of the whole guide

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