Is your business eligible to use cash basis accounting?

Cash basis accounting is a simplified method used by sole traders and other unincorporated businesses to work out income and expenses for self-assessment in a straightforward manner. 

The cash basis is the default method for calculating income and expenses for self-employed individuals and partnerships when completing their Income Tax self-assessment return. Businesses that prefer traditional accruals accounting, or are not eligible for cash basis, must opt out of the cash basis when submitting their return.

One of the main benefits of cash basis is that businesses only record income when payment is received and expenses when they are paid. This means they do not pay Income Tax on money they are still waiting to receive, which can help improve cash flow management.

The scheme can also simplify accounting records. Equipment purchased for business use can usually be claimed as an allowable expense rather than through capital allowances, making the process more straightforward.

Cash basis is available to sole traders and partnerships without corporate partners. However, limited companies, limited liability partnerships and certain other businesses cannot use the scheme. Traditional accounting may also be more suitable for businesses with complex arrangements, significant stock levels or those needing accounts for finance and funding purposes.