PLEASE NOTE: The charity TaxAid advises only those people on low incomes whose problems cannot be resolved with HMRC.

Cash basis accounting

Self-employed - running a business and paying tax

Business accounts are normally prepared using accounting rules which include making adjustments for amounts owed to, and owed by, a business at the end of its accounting year.
This basis is the generally accepted basis for preparing accounts for tax purposes. But rules which first apply from the tax year 2013-14, permit smaller businesses to prepare accounts for tax purposes on a different basis, that of the cash received and paid by the business.
The aim is to simplify reporting for smaller businesses – particularly for people who are claiming universal credit. The impact of using cash accounting will depend on your business and the type of expenses you have.  For example, there are restrictions on making loss claims and averaging claims for farmers and writers / artists. These are some points you may need to consider:

  • The HMRC cash basis scheme may be used from the tax year starting on 6 April 2013
  • It is optional for small businesses – any sole trader or partnership business (excluding limited company partnerships) with a turnover under the VAT limit can join the scheme. The relevant VAT limit is the one applying for the year in which you use the cash basis
  • Businesses within cash basis accounting will have much reduced opportunities for loss relief. Business losses can only be carried forward against future profits of the same business. They cannot be relieved against other income or carried back
  • Relief for interest paid is restricted to £500 per annum
  • The cash basis is not available in a number of circumstances, including:
  1. Businesses which make a farmer’s or market gardening averaging election
  2. Businesses which have made a herd basis election

Cash basis accounting can be used along side the simplified expenses (flat rate deduction) rules for motor expenses and business use of home, but it is not compulsory for income tax to use the flat rate deductions with cash basis accounting. (See under Use of Home as Office and Using your private car for business purposes for details of the simplified expenses method).

There is a basic introduction to the cash basis rules on the Gov.UK website at

https://www.gov.uk/simpler-income-tax-cash-basis

Detailed guidance is available in the HMRC Business Income Manual at
http://www.hmrc.gov.uk/manuals/bimmanual/BIM70000.htm