Under the cash basis, most equipment a sole trader buys to use in the business, such as tools, computers, machinery and vans, is deducted as an ordinary expense when it is paid for, instead of through capital allowances. Section 33A of the Income Tax (Trading and Other Income) Act 2005 blocks a deduction for some capital costs, notably cars, property and buildings, assets expected to last more than 20 years and the purchase of a business. Cars stay in the capital allowances system; property and buildings get no cash basis deduction at all.

How does the cash basis treat capital spending?

Under accruals accounting, capital spending is kept out of the profit and relieved through capital allowances, usually the annual investment allowance for equipment. The cash basis takes a simpler route. HMRC’s Business Income Manual at BIM72035 says capital expenditure is treated as an allowable business expense, except for the items listed in section 33A. GOV.UK gives machinery, computers and vans as examples of things claimed as normal expenses.

The deduction follows the cash. Equipment bought on hire purchase or by instalments is deducted as each payment is made; HMRC’s examples at BIM72067 show instalments deducted in the year they are paid, with the business share of any interest also allowable. If an asset is used partly privately, only the business proportion is deducted. The ordinary capital vs revenue distinction still decides which column a cost goes in, but on the cash basis it changes the timing and route of relief less often than under accruals.

Which capital costs cannot be deducted?

Section 33A ITTOIA 2005 allows no deduction for capital expenditure on, or in connection with:

  • acquiring or disposing of a business or part of a business, which includes paying for goodwill;
  • education or training;
  • providing, altering or disposing of an asset that is not a depreciating asset;
  • an asset not acquired or created for continuing use in the trade;
  • a car;
  • property in the sense of sites and buildings, discussed below;
  • a non qualifying intangible asset; or
  • a financial asset, meaning rights under a financial instrument or an arrangement producing an equivalent return.

An asset is depreciating if, when the money is spent, it is reasonable to expect that within 20 years its useful life will end or it will lose 90% or more of its value. Useful life ends when the asset could no longer be of use to anyone as a business asset. Most tools, vehicles and IT equipment pass this test easily. An intangible asset, such as a licence or software right, is non qualifying unless it has a fixed maximum duration that ends within 20 years (BIM72037). A three year software licence qualifies; goodwill does not.

Why are cars treated differently?

Cars are carved out by section 33A(4)(c). The definition is the capital allowances one in section 268A of the Capital Allowances Act 2001: a mechanically propelled road vehicle other than a motorcycle, a vehicle primarily suited to carrying goods or burden, or a vehicle of a type not commonly used privately and unsuitable for such use. So a van is deducted as an expense, while a car is not.

BIM72035 confirms that capital allowances remain available for a car, provided the business mileage rate has not been claimed on it. The trader therefore chooses for each car between capital allowances plus actual running costs, and the flat mileage rate under simplified expenses. GOV.UK’s simplified expenses guidance gives 55p a mile for the first 10,000 business miles and 25p after that for cars and goods vehicles in 2026 to 2027, and says the flat rate cannot be used for a vehicle already claimed through capital allowances or included as an expense. Once the flat rate is used for a vehicle it must continue while that vehicle is used in the business. A van deducted in full when bought is therefore locked out of the mileage rate. The allowance rules for cars are in capital allowances on cars.

Why are property and buildings treated differently?

Section 33A(4)(d) denies a deduction for capital spending on providing, altering or disposing of real property, and BIM72036 explains that this includes depreciating assets installed or fixed so that in law they become part of the property. Buying a workshop, building an extension or putting up a new wall is not deductible on the cash basis.

There is an exception in section 33A(5). Spending on a depreciating asset that becomes part of the property when installed is deductible, unless it is spent on, or in connection with:

  • a building;
  • a wall, floor, ceiling, door, gate, shutter, window or stairs;
  • a waste disposal system;
  • a sewerage or drainage system; or
  • a shaft or other structure in which a lift, hoist, escalator or moving walkway may be installed.

So a machine bolted to a workshop floor can qualify, but the floor itself cannot. Repairs that are revenue in nature remain deductible under the normal rules whatever the basis.

What happens when you sell the asset or stop using it?

Because the cost was deducted, the proceeds are taxed. Section 96A ITTOIA 2005 and BIM72020 treat sale proceeds, capital refunds, insurance money and compensation for an asset whose cost was deducted under the cash basis as a trading receipt, reduced proportionately if only part of the cost was deducted. A receipt equal to market value also arises when the trader stops using the asset in the business. If private use materially increases, a receipt arises for the relevant proportion of market value. HMRC’s example: a van costing £5,000 used 90% for business, giving a £4,500 deduction; when business use falls to 70% and the van is worth £4,000, a receipt of £800 (20% of £4,000) arises. There is no matching deduction if business use later rises.

BIM72035 adds that, under section 47A of the Taxation of Chargeable Gains Act 1992, no chargeable gain arises on an asset relieved under the cash basis, even if the business has since left the cash basis; the proceeds are dealt with as a trade receipt or as capital allowance disposal value instead.

What does this look like in a typical year?

Illustration only. A self employed electrician on the cash basis pays the following in 2026 to 2027:

Purchase Cost paid Cash basis treatment
Van, used only for business £16,000 £16,000 expense in 2026 to 2027
Laptop, 80% business use £1,500 £1,200 expense
Testing equipment on hire purchase, 6 instalments paid £900 of cost £900 expense; later instalments deducted when paid
Car, partly private use £22,000 No expense; capital allowances for the business share, or mileage rate instead
Extension to home workshop £9,000 No deduction

What happens to capital allowances when you change basis?

A business entering the cash basis with unrelieved balances in its main or special rate pools deducts the cash basis deductible part in the first cash basis year (section 240C; BIM72067 gives an example of a £1,545 pool balance deducted alongside new purchases). Expenditure on cars stays in the pool and continues to attract allowances. Where allowances were claimed on equipment that was not yet fully paid for, section 240D brings in a receipt for the difference. On leaving the cash basis, BIM72073 brings equipment still in use into the pool at cost less the amount already deducted, so a fully paid item usually enters at nil. The wider calculation is in moving from cash basis to accruals: adjustments.

What mistakes come up most often?

  • Deducting the cost of a car as an expense.
  • Deducting building work, such as new walls, windows or an extension.
  • Claiming the mileage rate for a van whose cost was deducted.
  • Leaving out sale or insurance proceeds for equipment already deducted.
  • Deducting the whole cost of an asset bought on finance before it is paid for.
  • Treating capital allowances rules as irrelevant; they still apply to cars and on changing basis. See capital allowances explained and the cash basis for sole traders.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.