1. 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, eg 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 (eg an accountant) or legal adviser if you need help.

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