Simplifying Self Assessment: Using the Cash Basis

Cash Basis Self Assessment

If you are self employed then using the cash basis when you work out the figures on your tax return can make your work a lot easier.

What is the Cash Basis

By using the cash basis you only include figures on your tax return according to what you have been paid and who you have paid.

So, for example, if you did work of £2,000 for a particular customer but they have only paid you £1,000 then you would only include £1,000 in your business turnover when it comes to filling out your tax return and working out your tax bill.

The same is true for your suppliers.  So if you owe a particular supplier £500 and have only paid them £300 then you can only include the £300 you have paid them in your allowable expenses.


What is Traditional Accounting

Under traditional accounting you would include the full invoice values rather than the cash paid or received.

So using the example above business turnover would need to include the full £2,000.

Who Can 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 (excl. VAT).

If you choose to use the cash basis and your business grows, you can continue to use it until your business turnover reaches £300,000.


How Does the Cash Basis Simplify Self Assessment

The cash basis makes preparing the figures for your tax return much easier.  As long as you open a separate bank account you can simply export the figures from your bank.

Under traditional accounting you would need to include everything according to invoices raised and received. Then as a separate exercise, go through bank statements to pick up any missed income and expenses.

Allowable Expenses Under the Cash Basis

Generally all business expenses are tax allowable under the cash basis.  You can find a full list of Allowable Expenses here.

Capital asset purchases like equipment or computer are not allowable but do fall under the category of capital allowances. So you will get tax relief for these larger purchases under a different set of rules.


When You Shouldn’t Use the Cash Basis

As with all HMRC Schemes there are people who they suit and people they don’t.  Here’s why you shouldn’t use the cash basis:

  • You want to claim interest or bank charges of more than £500 as a business expense;
  • Your business has high levels of stock;
  • You have trading losses you want to offset against other taxable income.

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