Cash Basis
Our guide to the Cash Basis of preparing Accounts and UK Tax Returns.
The Cash Basis is a relatively new basis of calculating profits for Income Tax for small Self Employed businesses in the UK, for filing Self Assessment Tax Returns, and is optional.
The Cash Basis is now HMRC’s standard way to record your income and expenses if you’re a sole trader
Introduction to the Cash Basis
The advantages of the Cash Basis is that records are kept, and profits and tax are calculated, based on the day that payments are made (ie. when the money moved), not the date on the fee invoices and bills.
Using the date that fees are received, and bills are paid, might seem the most obvious, and it’s usually the easiest method, but it is not the historically accepted “traditional / accruals” method.
The Cash Basis is suitable for Self Employed people but not limited companies, and there are limitations.
Why are there different ways of calculating profit and tax?
Cash Basis
For example: If your are completing your 2024/25 Self Assessment, and your accounts are up to 5/4/25: If you had an expenses bill dated in March 2025, which you paid in May 2025, this expense would not be allowed as a tax deduction for 2024/25 if you selected the Cash Basis option. The tax deduction would be allowed for 2025/26, the tax year in which the bill was actually paid.
Similarly for your fees to clients, if your fee invoice is dated March 2025, and you did not get paid by the client until May 2025, if you chose the Cash Basis, you would declare this fee on your 2025/26 tax return.
Accruals Basis
The accruals basis is the historical ‘traditional’ basis, and is still the legally required basis for limited companies.
The accruals basis records fee income and expenses on the date of the treatment or expense, ie. the invoice date, not the date they are paid.
In healthcare, the treatment and the payment are often on the same day, so in reality there is usually very little difference.
Comparing the Cash and Accruals Bases
So which makes more sense? You may conclude that with ‘swings and roundabouts’ and lots of sales, the Cash Basis would even itself out. It might, but it might not. Certainly the Cash Basis will probably be easier for most small businesses.
The accruals basis is used for larger businesses because it more accurately matches the sale with the cost of the sale in the same accounting period, which makes financial reporting more meaningful. Of course, this requires more accounting expertise to get it right. Limited companies must use the accruals basis by law.
Conclusion
HMRC now regard the Cash Basis as standard. This makes accounts easier to prepare.
If you choose this option, you will simply record your sales and purchases on the day you received or paid the cash. You might be doing this anyway.
We use the Cash Basis for our Self Employed healthcare clients, unless they prefer the accruals basis because of their business circumstances.
This was just an outline, there are some rules to be aware of which we will explain to our clients if the need arises.
HMRC Link
