As a sole trader or partner in the UK, it’s essential to understand the changes coming to the way you calculate your income and expenses for your Self Assessment tax return. From the 2024 to 2025 tax year onwards, cash basis accounting will be the default method, unless you choose to use traditional accounting or are ineligible for cash basis. In this article, we’ll break down what cash basis accounting means, the key changes to be aware of, and how to get started.

What is Cash Basis Accounting?

Cash basis accounting is a simpler way to record your business income and expenses. Under this method, you only record income when you actually receive the money and expenses when you actually pay them. This is different from traditional accounting, where you record income and expenses based on when they’re earned or incurred, regardless of when the money changes hands.

Key Changes to Cash Basis from 6 April 2024

Several important changes to cash basis accounting come into effect from the 2024 to 2025 tax year:

1. Turnover thresholds removed: Previously, there were turnover limits of £150,000 and £300,000 for using a cash basis. These have now been removed, making cash basis available to more businesses.
2. No more cap on interest deductions: The £500 cap on interest deductions has been lifted, allowing you to claim more interest expenses.
3. Fewer restrictions on loss offsets: The restriction on offsetting losses against other taxable income has been removed, giving you more flexibility in managing your tax position.4. Choice for multiple businesses: If you have more than one business, you can now choose between cash basis or traditional accounting for each one separately.

Who Can’t Use Cash Basis?

While most sole traders and partners can use cash basis, some types of businesses are not eligible:

• Limited companies and limited liability partnerships
• Lloyd’s underwriters
• Farming businesses with a current herd basis election
• Farming and creative businesses with a section 221 ITTOIA profit averaging election
• Businesses that have claimed business premises renovation allowance
• Mineral extraction trades
• Businesses that have claimed research and development allowance
• Dealers in securities
• Businesses with relief for mineral royalties or lease premiums
• Ministers of religion
• Businesses involved in pool betting duty, managed service companies, waste disposal, cemeteries, or crematoria.

If your business falls under one of these categories or if you prefer to use traditional accounting, you can opt out of cash basis when filing your Self Assessment tax return.

Getting Started with Cash Basis

To start using cash basis accounting, you’ll need to maintain records of all your business income and expenses. At the end of the tax year, calculate your taxable profit based on these records and tick the relevant box on your tax return to indicate you’re using cash basis.

If you’re switching from traditional accounting to cash basis, you may need to make some adjustments. HMRC provides guidance on these transitional arrangements.

Recording Income and Expenses

Under cash basis, you only record income when you actually receive the money and expenses when you actually pay them. For example, if you invoice a client on 15 March 2023 but don’t receive the payment until 30 April 2023, you would record this income in the 2023 to 2024 tax year, not the 2022 to 2023 tax year.

Allowable expenses under cash basis include day-to-day running costs, administrative expenses, training costs, equipment and machinery costs, interest and charges up to £500, and the cost of goods for resale. You can also use simplified expenses for vehicle costs, working from home, and living on your business premises.

When it comes to cars and other equipment, you can claim cars as capital allowances (unless using simplified expenses for that vehicle). For other equipment, you claim the full cost as an allowable expense in the year of purchase instead of using capital allowances.

Keep Your Records Safe

While you don’t need to send your records to HMRC with your tax return, you must keep them safe in case HMRC asks to check them. Good record-keeping is essential to make sure you’re paying the right amount of tax and can support your figures if questioned.

Making the Switch

Cash basis accounting offers a simpler way for many sole traders and partners to manage their business finances and tax reporting. If you’re eligible and think cash basis could work for you, start keeping your records using this method from 6 April 2024. If you need help determining whether cash basis is right for your business or need help making the transition, consider seeking advice from a qualified accountant or tax professional.