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HMRC internal manual

Capital Gains Manual

Cash basis for small businesses - capital gains aspects: introduction

This guidance applies to trades where a cash basis election under ITTOIA05/S25A is, or has been, in place.

TCGA92/S47A, TCGA92/S47B

When a person carrying on a trade makes a cash basis election (ITTOIA05/S25A, BIM70010), the profits of that trade for income tax purposes are calculated based on the cash flows in and out of the trade, ignoring the usual distinction between revenue and capital. As a result, any gain or loss on a capital asset to which the cash basis rules apply (i.e. plant and machinery) will be dealt with as an income profit or loss.

The capital gains tax rules at TCGA92/S47A and S47B apply such that there is no double taxation of gains arising when a cash basis election is in force and no gain escapes tax on transition into or out of the regime. The rules mean that tax relief is given only once for any loss.

Full guidance on the cash basis can be found at BIM70000.