HMRC Cash Basis for Self-Assessment

HMRC Cash Basis for Self-Assessment. When you are self-employed, choosing to use the cash basis can make completing your tax return quicker and easier. Here’s more about the cash basis, how to check if you are eligible and why you should or shouldn’t use it.

The cash basis is a way of recording your income and expenses, that makes tax returns easier for the self-employed.

What is the Cash Basis

When you complete your self-assessment tax return, you need to include all your income and expenses during your accounting period to work out your tax.

By using the cash basis you only need to record income and expenses according to what you have received or paid.

If you choose not to use this method you’ll need to make accounting adjustments to show your income and expenses according to what invoices you have received or sent.

That can be complicated and time-consuming, especially if you complete your own tax return rather than using an accountant.

An Example of Cash Basis v Traditional Accounting

During the tax year 2018/2019 you invoice a customer £2,000 but they only pay you £1,000 of the invoice during that tax year. You would only need to include £1,000 in business turnover on your tax return.

Using the cash basis means at the end of the tax year you only pay tax on the money you have actually received.

Under traditional accounting, you would need to include the full £2,000 in your tax return.

If you keep a separate bank account for your business, then you may be able to run your bank statements for the tax year and add up everything you were paid and paid out to generate the figures you need for your tax return.

Who is Eligible to Use the Cash Basis

You can only use cash basis if:

  • you are self-employed;
  • your business has a turnover of £150,000 or less a year (£300,000 if you claim universal credit).

Once you have chosen to use the cash basis you can continue to use it until your business turnover reaches £300,000.

Who Isn’t Eligible to Use the Cash Basis

There are some very specific groups who cannot use the cash basis. These include:

  • 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
  • businesses that carry on a mineral extraction trade
  • businesses that have claimed research and development allowance
  • limited companies
  • limited liability partnerships
  • dealers in securities
  • relief for mineral royalties
  • lease premiums
  • ministers of religion
  • pool betting duty
  • intermediaries treated as making employment payments
  • managed service companies
  • waste disposal
  • cemeteries and crematoria

If you cannot use the scheme, you’ll need to use traditional accounting.

Advantages of Using the Cash Basis

There are some clear advantages of choosing to use the cash basis:

  1. It makes completing your own tax return easier.
  2. You’ll only pay tax on income you’ve actually been paid for. So if you have a slow-paying client, you’ll only pay tax on those earnings once they pay you.
  3. You avoid the hassle of dealing with capital allowances (except for cars), claiming tax relief on all your expenses in the year you pay for them.

Should You Use the Cash Basis?

Those are some great advantages. But even if you are eligible to use the cash basis should you use it?

Well, it depends on your business.

Here are some common scenarios where people opt to not use the cash basis:

  • They want to claim interest or bank charges of more than £500 as a business expense;
  • Their business has high levels of stock;
  • They have trading losses you want to offset against other taxable income;
  • They want to monitor “true” profit of their business. For example, if you pay for expenses on a job but the client doesn’t pay you in the tax year, you’ll record your profits lower than they are in reality.

Can You Switch Between the Cash Basis and Traditional Accounting

Yes, you can switch between the two schemes but that can make completing your tax return tricky and more time-consuming.

If you want to make the switch to cash basis then here are some things for you to consider before you do it:

  • you’ll need to make sure you don’t double-count or omit income and expenses on switching;
  • you must use the same method each tax year so you can’t change each tax year;
  • a loss incurred by a business switching to the cash basis can only carried forward. It cannot be used as sideways relief against other income or be carried back against earlier year’s profits.

Using Losses Under the Cash Basis

The cash basis for some can reduce their tax bill or even create a tax loss.

But there are strict rules about how you can use these types of losses:

  • losses cannot be set off against other income except for your self-employment profits (known as “sideways relief”);
  • losses cannot be carried back and set against any previous years income’
  • terminal losses must be set against any profits (after deducting losses brought forward) from the same business taxed in the tax year 6 April 2018 to 5 April 2019
  • any remaining terminal losses must be set against the profits of the same business taxed in the 3 prior years. Starting with the latest year

Updated 27 May 2019

Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.