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Cash basis

Contents

1. Overview
2. Who can use cash basis
3. Getting started
4. How to record income and expenses
5. VAT registered businesses

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.

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 won’t have to pay Income Tax on money you didn’t receive in your accounting period.

When cash basis might not suit your business

Cash basis probably won’t 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.

Find out if you’re eligible to use cash basis.

•  Next:Who can use cash basis

• 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.

  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 can’t use the scheme

  Limited companies and limited liability partnerships can’t use cash basis.

  There are also some specific types of businesses that can’t 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 can’t use cash basis, you’ll need to use traditional accounting to work out your taxable profits.