HMRC have introduced a cash basis for small self-employed businesses (sole traders and partnerships) to record their income and expenses for their self assessment tax return which can first be used from April 2013 for the 2013-14 tax year instead of using the traditional accruals basis.

The cash basis is a method whereby you record money when it actually comes in and goes out of your business whether it is by cash, card payment, cheque etc,. The accruals basis is whereby transactions are recorded when an invoice is issued to a customer and received from a supplier.

To use the cash basis your total business income must be below £79,000, the current VAT registration threshold. Once you are using the cash basis you can continue in the scheme if your business income grows up to an income of £158,000. Over that higher limit the accruals basis will need to be used for the next tax year’s tax return. Existing businesses switching from the accruals basis to the cash basis may need to make some adjustments when they switch - similarly when you leave the scheme.

The cash basis may not suit all businesses. Limited companies and limited liability partnerships cannot use the scheme. There are also some specific types of business that cannot use the scheme such as certain farming businesses, dealers in securities, mineral extraction businesses.

You can use the simplified expenses scheme in conjunction with the cash basis for vehicle expenses, working from home or living on your business premises. See our earlier articles simplified expenses and business use of home  .   

More information is available here.

If you require further help please contact us