Cash

You can use cash basis if you’re 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’re a:

• Lloyd’s 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’ll not be able to use these rules.

If you cannot use cash basis

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

When you send your Self Assessment tax return you’ll need to say that you’ve used traditional accounting.

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

From 6 April 2024, 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 £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.

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 £300,000 per year. Above that, you’ll need to use traditional accounting 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’re a:

• Lloyd’s 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’ll need to use traditional accounting 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’ll not be able to use these rules.

Sending your tax return

If you’ve used cash basis, you’ll need to let us know when you send your Self Assessment tax return.

You must keep records of all business income and expenses. You’ll 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’re 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

You invoiced someone on 15 March 2024 but did not receive the money until 30 April 2024. Record this income as received on 30 April 2024.

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’ve 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’re 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.

If you’re currently claiming capital allowances and want to switch to cash basis, find out what changes you need to make.

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 HMRC 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.