Cash basis

4. How to record income and expenses

You must keep records of all business income and expenses to work out your profit for your tax return.

Income

With cash basis, only record income you actually received in a tax year. Don’t count any money you’re owed but haven’t yet received.

ExampleYou invoiced someone on 15 March 2016 but didn’t receive the money until 30 April 2016. Don’t record this income for your 2015 to 2016 tax return, but instead for 2016 to 2017.

You can 
choose how you record when money is received or 
paid (eg the date the money enters your account or the date a cheque is written) but you must use the same 
method each tax year.

All payments count - cash, card, cheque, payment in kind or 
any other method.

Expenses

Expenses are business costs you can deduct from your income to calculate your taxable profit. In practice, this means your allowable expenses reduce your Income Tax.

Only count the expenses you’ve actually paid. Money you owe isn’t counted until you pay it.

Examples of allowable business expenses if you’re using cash basis are:

  • day to day running costs, eg electricity, fuel
  • admin costs, eg stationery
  • things you use in your business, eg machinery, computers, vans
  • interest and charges up to £500, eg interest on bank overdrafts
  • buying goods for resale

You can check what else counts as an allowable expense.

For the 2013 to 2014 tax year onwards you can also choose to use the simplified expenses scheme instead of calculating expenses for:

  • running a vehicle
  • working from home
  • making adjustments for living on your business premises

Cars and other equipment

If you buy a car for your business, you can claim the purchase as a capital allowance (but only if you’re not using simplified expenses to work out your business expenses for that vehicle).

Unlike traditional accounting, you claim other equipment you buy to keep and use in your business as a normal allowable business expense rather than as a capital allowance.

If you’re currently claiming capital allowances and want to switch to cash basis, HM Revenue and Customs (HMRC) have guidance on the changes you need to make.

Keep your records

You don’t need to send your records to HM Revenue and Customs (HMRC) when you send in your tax return but you need to keep them in case they ask to check them.