From 6 April 2024 the cash basis is the default way for sole traders and partnerships made up only of individuals to work out their trading profit. Profit is the money actually received in the tax year less the allowable expenses actually paid in it, with no debtors, creditors, stock or work in progress at the year end. A trader who wants to use traditional accruals accounting has to elect for it on the tax return.

Who is on the cash basis by default?

Section 24A of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) says the profits of a trade must be calculated on the cash basis unless the trade is excluded or the trader has elected under section 25C for generally accepted accounting practice (GAAP). There is no longer a turnover limit. GOV.UK explains that before 2024 to 2025 a business could only join with turnover of £150,000 or less and had to leave once turnover passed £300,000; those limits no longer apply.

Section 25B lists the excluded trades. In summary, a trade cannot use the cash basis in a tax year if it is carried on by:

  • a partnership with a partner who is not an individual, or a limited liability partnership;
  • a trader with a herd basis election or a claim to average fluctuating profits for the year;
  • a trader who obtained business premises renovation allowance in the seven years before the tax year;
  • a mineral extraction trade; or
  • a trader who obtained research and development allowances and still owns the asset concerned.

GOV.UK also confirms that limited companies cannot use it, and that a sole trader with more than one business can choose the cash basis or traditional accounting separately for each one. Whether the default suits a particular business is covered in cash basis vs accruals accounting.

How is the taxable profit worked out?

Section 31E sets out two steps: total the receipts of the trade received during the tax year, then deduct the total expenses of the trade paid during the tax year. The result is then subject to any adjustment required or authorised by law, so the ordinary rules on disallowable items still apply. Where the accounts run to a date other than the tax year end, section 31E(4) applies the same apportionment by days as for accruals accounts. HMRC’s overview at BIM72005 summarises it: instead of a balance sheet and profit and loss account, the records only need to show money coming in and going out.

When does income count?

Income counts when it is received. An invoice issued on 15 March and paid on 30 April belongs to the period containing 30 April. BIM72015 lists what counts as a receipt:

  • cash and cheques, tips, fees and commissions;
  • the value of payments in kind for work done or goods sold;
  • some capital receipts, such as proceeds from selling equipment whose cost was deducted (see capital purchases under the cash basis);
  • the value of trading stock, or work in progress for a profession, when the business permanently ceases (BIM72025 says a just and reasonable value, such as cost or net realisable value, is used); and
  • certain transitional adjustments in the first cash basis year.

The trader may choose the date that counts as received or paid, for example the card payment date or the date the entry appears on the bank statement, provided the same method is used consistently (BIM72005). Because unpaid invoices are never income, there is no bad debt relief to claim. Goods taken for personal use are not added back at market value as they would be under accruals; BIM72015 says a just and reasonable adjustment is made instead, for example disallowing the cost of those goods.

When do expenses count?

Expenses count when they are paid. BIM72030 confirms the cash basis does not usually change which expenses are allowable; the exceptions are capital expenditure and the restriction on hiring certain cars. Mixed business and private costs are apportioned, and the flat rates in simplified expenses can be used for vehicles, working from home and living at business premises. Stock for resale is deducted when it is paid for, whether or not it has been sold by the year end.

Capital items are the main difference from accruals. GOV.UK explains that equipment bought to keep and use in the business, such as machinery, computers and vans, is claimed as an ordinary expense rather than through capital allowances, while cars stay within capital allowances. Section 33A ITTOIA 2005 lists the capital costs that cannot be deducted.

Two old restrictions have gone. Section 51A ITTOIA 2005, which capped deductible loan interest for cash basis traders, and section 74E of the Income Tax Act 2007, which blocked sideways relief for cash basis losses, were both omitted for 2024 to 2025 onwards by Finance Act 2024.

How does VAT fit in?

BIM72005 says the cash basis does not change how VAT is accounted for. A VAT registered trader may record income and expenses either including or excluding VAT, but must treat both the same way. If figures include VAT, VAT paid to HMRC is an expense and VAT repaid by HMRC is income. BIM72005 also warns that the VAT registration test uses VAT rules, which may not match cash basis receipts, so cash basis turnover is not a safe guide to the threshold. The income tax cash basis is also separate from the VAT cash accounting scheme; a business can use either without the other.

What does a cash basis year look like?

Illustration only. A self employed electrician uses the cash basis and a 5 April year end. In 2026 to 2027 she banks £52,000 from customers. At 5 April 2027 customers owe her £3,500 for completed jobs. She pays £15,800 of allowable expenses, including £1,200 for a laptop used only for the business and £2,100 for materials, some still unused at the year end.

Item Treatment Amount
Receipts banked Taxed when received £52,000
Unpaid invoices at 5 April 2027 Not income until received £0
Expenses paid, including laptop and unused materials Deducted when paid (£15,800)
Taxable profit £36,200

The £3,500 is taxed in 2027 to 2028 when the customers pay. Under accruals it would have been taxed in 2026 to 2027, and the unused materials would have been carried forward as stock.

What records are needed?

GOV.UK says all business income and expenses must be recorded and the records kept in case HMRC asks to check them; they are not sent with the return. The records need to show the date of each receipt and payment under the chosen method, and enough detail to separate business and private use. The general requirements are covered in self employed record keeping.

What are the common mistakes?

  • Totalling invoices issued rather than money received, which taxes income early.
  • Switching between the bank statement date and the payment date from year to year.
  • Leaving out payments in kind, such as goods or services received instead of cash.
  • Deducting the cost of a car as an expense; cars stay in capital allowances.
  • Forgetting the stock or work in progress receipt when the business stops.
  • Assuming the default suits every business. Those that want accruals must tick the box each year, as explained in when to opt out of the cash basis. Landlords have a separate regime, covered in the cash basis for property income.

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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.