Cash basis for the self-employed – a reminder of what you need to know

Following the expansion of the cash basis for the self-employed, this has been the default method for most unincorporated businesses since 6 April 2024. Now that the tax year-end has passed, accountants and tax advisers will be in the process of dealing with tax returns for the 2024/25 tax year. 

Section 24A ITTOIA 2005 states how the cash basis will apply by default unless the taxpayer operates an excluded trade as outlined in Section 25B ITTOIA 2005. The main businesses which are excluded trades and cannot use the cash basis are: 

What is the cash basis? 

In its simplest terms, under Section 31E ITTOIA 2005, businesses using the cash basis will deduct their expenses actually paid during the year from income received in the year. Cash basis eliminates the need to account for debtors, creditors and stock, although there are special rules on particular expenditure. 

Cash basis businesses will not ordinarily be able to claim Capital Allowances but will be able to claim a deduction for equipment as an expense. However, no deduction whatsoever is allowed for capital items on the acquisition/disposal of a business or part of a business, education or training, assets that are not depreciating assets, or assets in continuing use in the trade. An expense deduction is also not available on a car, land, non-qualifying intangible assets or financial assets. 

It will, however, be possible to claim Capital Allowances on expenditure on cars in the normal way. 

Opting out of the cash basis 

Whilst cash basis now applies as the default, unincorporated businesses can still opt out of the cash basis and continue with traditional accruals accounting. 

HMRC manuals have guidance on the treatment to be taken leaving the cash basis. This is designed to ensure that income is only taxed regardless of changes between the bases. 

Let us know your views 

We welcome your views, which help inform our work on consultations or other tax-related matters. We responded to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members. 

Please get in touch to share your insights and feedback.