When a sole trader moves between the cash basis and accruals, Chapter 17 of Part 2 of the Income Tax (Trading and Other Income) Act 2005 requires a one off adjustment so that income is taxed once and expenses are relieved once. On leaving the cash basis, a positive adjustment is adjustment income, taxed in equal sixths over six tax years unless the trader elects to speed it up; a negative adjustment is deducted in full in the first accruals year. On joining the cash basis, the adjustments are made to the first cash basis year’s receipts and expenses instead.

Why does switching basis need an adjustment?

The two bases recognise the same income and costs at different times. HMRC’s Business Income Manual at BIM72070 gives the core problem: money received in the first accruals year for work done in the last cash basis year is not income of the accruals year, because the work was done earlier, yet it was never taxed under the cash basis either, because it had not been received. Without an adjustment it would never be taxed. Supplier bills work the other way, and prepaid costs and stock create similar gaps. Section 227A ITTOIA 2005 applies Chapter 17 whenever the cash basis applies in one tax year and not the next, or the reverse.

How is the adjustment calculated when leaving the cash basis?

Section 231 sets out the formal steps. BIM72071 reduces them to two lists, measured at the end of the last cash basis period:

  1. Add the amounts customers owed the business and the amount paid for stock still held.
  2. Add the amounts the business owed its suppliers and any income received for work not yet done.

Deduct the second total from the first. Section 228 says a positive result is adjustment income, charged to tax, and a negative result is an adjustment expense, deducted in calculating the profits of the trade.

HMRC’s own example: customers owed £400 and paid stock was £60, a total of £460; suppliers were owed £220 and £1,000 had been received in advance for work in the next period, a total of £1,220. The result is negative £760, an adjustment expense deducted in full in the first period after leaving the cash basis.

How is adjustment income taxed?

Section 232 treats adjustment income as arising on the last day of the first period of account on the new basis. Section 239A then spreads it when the change is out of the cash basis: one sixth is treated as arising and charged in each of the six tax years starting with the year it would otherwise have been taxed. Section 239B lets the trader elect to bring an additional amount into charge in any of those years, by the first anniversary of the normal self assessment filing date for that year, stating the amount. The sixths for the remaining years are then reduced by a formula in section 239B(4) based on the extra amount and the number of years left.

Two further points in section 232 are easily missed. Adjustment income counts as profits of the trade for loss relief in the year it is taxed, so trading losses can be set against it, and where the trading income is relevant UK earnings for pension relief, the adjustment income is too. On the 2025 to 2026 full self employment pages (SA103F) the amount taxable for the year goes in box 71, adjustment for change of accounting practice.

Worked example

Illustration only. A decorator with a 5 April year end leaves the cash basis from 2027 to 2028. At 5 April 2027 customers owe £9,000, paid stock is £4,500, suppliers are owed £1,500 and nothing has been received in advance.

Item Amount
Debtors plus stock £13,500
Less creditors and income in advance (£1,500)
Adjustment income £12,000
Taxed each year, 2027 to 2028 through 2032 to 2033 £2,000

If a later year has low income, the decorator could elect to bring more of the £12,000 into that year.

What about prepayments and equipment on leaving?

Costs paid in advance while on the cash basis were deducted in full when paid. Section 234 stops them being deducted again: BIM72072 uses business rates of £1,200 paid in March 2025 for the year from 1 April 2025, of which £1,183 relates to the first accruals year; that £1,183 is disallowed in the accruals computation.

Equipment needs a separate step under section 66A of the Capital Allowances Act 2001. BIM72073 says items still in use are added to a capital allowances pool at cost, and the amount already deducted under the cash basis is taken off, so an item fully paid for usually enters at nil. If £1,500 of a £2,000 item has been paid and deducted, £500 enters the pool. Future sale proceeds then go into the pool. Assets that would not have qualified for allowances stay outside the pool and their sale proceeds are taxed as trading receipts. See capital purchases under the cash basis.

What happens when moving into the cash basis?

The reverse switch is common now that the cash basis is the default. BIM72060 explains that a business taxed on accruals last year must adjust its first cash basis return where it had debtors, creditors, stock, accruals, prepayments, income in advance, capital allowance balances, assets bought on instalments, finance leases or VAT inclusive figures. HMRC’s examples at BIM72065 and BIM72066 work like this:

  • Debtors: £32,000 received in the year, of which £1,750 was owed at the last accruals year end and already taxed, gives adjusted receipts of £30,250.
  • Creditors: £14,000 paid to suppliers, of which £950 was already deducted, gives £13,050.
  • Stock: closing stock of £475 from the last accruals year is added to purchases so it is relieved.
  • Prepayments and income in advance: a £1,000 prepayment carried forward is added to costs, and £4,500 of income received in advance last year is added to receipts.

For capital allowances, section 240C deducts the cash basis deductible part of any unrelieved pool balance in the first cash basis year, while car expenditure stays in the pool. Where allowances exceeded the amount actually paid for an asset, section 240D brings in the difference as a receipt; BIM72067 shows £5,250 of unpaid hire purchase instalments treated as a receipt, with each instalment then deducted as paid. The six year spreading in section 239A applies only on leaving the cash basis, not on joining it.

What mistakes come up most often?

  • Not making any adjustment, so last year’s debtors are taxed twice or never.
  • Taxing all the adjustment income in one year when spreading applies, or forgetting the later sixths.
  • Deducting a prepaid cost a second time in the first accruals accounts.
  • Leaving equipment out of the capital allowances pool, then failing to bring sale proceeds into account.
  • Switching basis repeatedly; each change produces a new calculation. When to switch is covered in when to opt out of the cash basis and cash basis vs accruals accounting.

Where is this reported and what records help?

The SA103F notes state that a business normally uses the same basis each year and that a change may need a transitional adjustment, and refer traders to helpsheet HS222. Keep the year end lists of debtors, creditors, stock, prepayments and income in advance from the last year on the old basis, plus the asset register, because these drive every figure in the calculation. The accounting side is explained in accruals and prepayments and the default rules in 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.