If you are a sole trader or partner, cash basis will be the default method to calculate your income and expenses when filing your Self Assessment tax return for the 2024 to 2025 tax year onwards.
From 6 April 2024, you must maintain records using cash basis for the 2024 to 2025 tax year, unless you;
- choose to use traditional accounting, or
- cannot use cash basis.
Businesses that cannot use cash basis must use traditional accounting.
Key changes to cash basis
- the £150,000 and £300,000 turnover thresholds have been removed
- the £500 cap on interest deductions has been removed
- the restriction on offsetting losses against other taxable income has been removed
- you can now choose between cash basis or traditional accounting for each of your businesses if you have multiple businesses.
Opting out or ineligibility
To use traditional accounting or if you cannot use cash basis accounting, the box to opt out should be ticked when filing your Self Assessment tax return.
Who cannot use cash basis
Limited companies and limited liability partnerships are not eligible to 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.
Getting started
At the end of the tax year the taxable profit from your cash basis income and expenses records will need to be calculated. You will need to indicate cash basis usage by ticking the relevant box on the tax 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.
Transitioning from traditional accounting to cash basis
Existing businesses using traditional accounting might have to make some adjustments when they switch to cash basis.
How to record income and expenses
You must maintain records of all business income and expenses to determine your profit for your tax return.
Income
With cash basis, only record income you actually received in a tax year. Do not include 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 be consistent each tax year.
All payment methods count, including 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 include:
- day-to-day running costs (e.g. electricity, fuel)
- administrative costs (e.g. stationery)
- training costs related to business operation
- equipment and machinery used in the business (e.g. machinery, computers, vans)
- interest and charges up to £500 (e.g., bank overdraft interest)
- purchasing 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 it 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 instead of 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.
The next step
If you have any questions or would like to discuss how we can support you please get in touch with Hayley Squires on h.squires@uhy-uk.com or your usual UHY adviser.
