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Cash basis accounting is the standard way to record your income and expenses if you鈥檙e a sole trader or partnership without corporate partners.

With cash basis you only record income or expenses when you receive money or pay a bill.

You鈥檒l use your records to work out your profit on your Self Assessment tax return. This means you鈥檒l not need to pay Income Tax on money you have not yet received.

Some businesses cannot use cash basis, for example, limited companies. Check if you can use cash basis.

Other ways to work out your profit

You can choose to use traditional accounting instead. With traditional accounting you record income and expenses by the date you invoiced or were billed.

You might choose this method if your business:

• is complex, for example, it has high levels of stock
• needs to get finance - a bank could ask to see accounts drawn up using traditional accounting to see what you owe and are due before agreeing a loan

If you use traditional accounting

You鈥檒l need to keep more records for traditional accounting.

When you send your Self Assessment tax return you鈥檒l need to say that you鈥檝e used traditional accounting.

You might have to make some adjustments if you switch to traditional accounting.

You can use cash basis if you鈥檙e a sole trader or partnership without corporate partners.

If you have more than one business, you can choose whether you use cash basis or traditional accounting for each business.

Who cannot use cash basis

You cannot use cash basis if your business is a:

• limited company
• limited liability partnership
• partnership with one or more corporate partners

You also cannot use cash basis if you鈥檙e a:

• Lloyd鈥檚 underwriter
• farming business with a current herd basis election
• farming or creative business with a fluctuating profit averaging claim
• business that has claimed business premises renovation allowance within the previous 7 years
• business that carries on a mineral extraction trade
• business that has ever claimed research and development allowance

When cash basis might not suit your business

Some businesses may choose to use traditional accounting instead because it means they can use different rules to calculate their profits. These rules apply if the business:

• deals in securities
• claims relief for mineral royalties
• leases premiums
• is a minister of religion
• pays pool betting duty
• is an intermediary treated as making employment payments
• is a managed service company
• makes waste disposals
• is a cemetery or crematoria

If you use cash basis you鈥檒l not be able to use these rules.

If you cannot use cash basis

If you cannot use cash basis, you鈥檒l need to use traditional accounting to work out your taxable profits.

When you send your Self Assessment tax return you鈥檒l need to say that you鈥檝e used traditional accounting.

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

You must keep records of all business income and expenses. You鈥檒l need to report these on your Self Assessment tax return to work out your profit.

Recording income

Only record income you actually receive. Do not count any money you鈥檙e owed but have not yet received.

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 return.

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

Example

Recording expenses

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

Only count the expenses you鈥檝e actually paid.

Examples of allowable business expenses if you use cash basis are:

• day to day running costs, such as electricity and fuel
• admin costs, for example, stationery
• training costs to help you run your business
• things you use in your business - for example, machinery, computers and vans (there are different rules for cars)
• interest and bank charges, for example, interest on bank overdrafts
• buying goods for resale

You can check what else counts as an allowable expense.

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鈥檙e not using simplified expenses to work out your business expenses for that vehicle).

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

VAT registered businesses

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聽HMRC聽as income

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.

From 6 April 2024,聽cash basis became the default method of accounting.

You can use cash basis for your records before the 2024 to 2025 tax year if you:

• run a small self-employed business, for example, sole trader or partnership
• have a turnover of 拢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 拢150,000.

If you used cash basis and your business grew during the tax year

You can stay in the scheme up to a total business turnover of 拢300,000 per year. Above that, you鈥檒l need to use聽traditional accounting聽for your next tax return.

Who cannot use the scheme for records before the 2024 to 2025 tax year

Limited companies and limited liability partnerships cannot use cash basis.

You also cannot use cash basis if you鈥檙e a:

• Lloyd鈥檚 underwriter
• farming business with a current herd basis election
• farming or creative business with a fluctuating profit averaging claim
• business that has claimed business premises renovation allowance within the previous 7 years
• business that carries on a mineral extraction trade
• business that has ever claimed research and development allowance

If you cannot use cash basis, you鈥檒l need to use聽traditional accounting聽to work out your taxable profits.

When cash basis might not suit your business

Some businesses may choose to use traditional accounting instead because it means they can use different rules to calculate their profits. These rules apply if the business:

• deals in securities
• claims relief for mineral royalties
• leases premiums
• is a minister of religion
• pays pool betting duty
• is an intermediary treated as making employment payments
• is a managed service company
• makes waste disposals
• is a cemetery or crematoria

If you use cash basis you鈥檒l not be able to use these rules.

Sending your tax return

If you鈥檝e used cash basis, you鈥檒l need to let us know when you send your Self Assessment tax return.