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 will only pay Income Tax on money received in your accounting period.
When cash basis might not suit your business
Cash basis probably will not 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’)
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 cannot use the scheme
Limited companies and limited liability partnerships cannot use cash basis.
There are also some specific types of businesses that cannot use the scheme:
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
ministers of religion
pool betting duty
intermediaries treated as making employment payments
managed service companies
cemeteries and crematoria
At the end of the tax year, work out your taxable profit from your cash basis income and expenses record.
Tick the cash basis box on the form when you send your 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.
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