What is the cash basis accounting method for small businesses?
Answered 11 March 2026
Here is a comprehensive answer on the cash basis accounting method for small businesses under UK tax law.
What the Law Says
The cash basis for small businesses is provided for under s.25A ITTOIA 2005 (for tax years up to 2023/24) and s.24A ITTOIA 2005 (for tax years from 2024/25 onwards), with related provisions at s.31E ITTOIA 2005 and s.74E ITA 2007.
Default status: For tax years beginning on or after 6 April 2024, a person must calculate profits or losses on the cash basis unless they have elected to use Generally Accepted Accounting Principles (GAAP) or are excluded from using it. For earlier tax years, the cash basis was optional.
Profit calculation: Profits reported on the cash basis are:
Total receipts of the trade received during the tax year, less total expenses of the trade paid during the tax year, subject to any adjustment required or authorised by law.
Exclusions — who cannot use the cash basis: The cash basis is available to unincorporated businesses only. The following are specifically excluded:
- Companies and Limited Liability Partnerships
- Partnerships with one or more corporate partners
- Lloyd's underwriters
- Businesses with a current herd basis election
- Persons with a s.221 ITTOIA 2005 profit averaging election
- Businesses that have claimed Business Premises Renovation Allowance within the preceding seven years
- Businesses carrying on a mineral extraction trade
- Businesses that have claimed Research and Development Allowance
Opting out (electing GAAP): An election can be made under s.25C ITTOIA 2005 to calculate profits in accordance with GAAP instead, using the checkbox on the Self Assessment return. A trader who wishes to continue using GAAP year on year must check the appropriate box each year.
HMRC Guidance / Practice
Core concept: The cash basis is described as "a simpler way of reporting income and expenses for income tax purposes for small businesses. It allows eligible businesses to account for business income and expenses when money is received or paid out, not on the date goods or services are invoiced."
Simplified record-keeping: Instead of preparing a full balance sheet and profit and loss account, "the business records only need to show money when it comes in or goes out. As receipts are recognised as income of the period in which they are received and expenses are outgoings of the period in which they are paid, there is no need to account for debtors, creditors, stock and work in progress."
Flexibility on timing: "The business can treat income as received and expenses as paid at the date of its choosing, as long as the treatment is consistent. For example, an expense may be paid when a card payment is made, or on the date that entry is shown on the bank statement."
VAT: The cash basis does not affect the way a business accounts for VAT. VAT-registered businesses using the cash basis may record receipts and payments either excluding or including VAT. Note also that the VAT Cash Accounting Scheme is a separate scheme — it allows businesses to account for VAT on the basis of payments made and received (rather than invoices) and gives automatic bad debt relief, but it cannot be used alongside the VAT Flat Rate Scheme.
Losses: Under the cash basis, losses can only be relieved against later profits of the same trade, or (where the trade has ceased) against profits of the same trade for the year of cessation.
Leaving the cash basis: Businesses leaving the cash basis must revert to GAAP and may need to make transitional adjustments to ensure income is taxed once and only once, and expenses are relieved once and only once.
Note on applicable guidance: HMRC guidance in BIM70005–BIM70100 applies to tax years ending on or before 5 April 2024. For tax years beginning on or after 6 April 2024, the relevant guidance is BIM72005–BIM72073.
Citation sources
S25C ITTOIA 2005 An election can be made under S25C ITTOIA 2005 to calculate profits in accordance with generally accepted accounting practice (GAAP), the election is made using the checkbox on the SA return. If the check box is not completed then cash basis must be used instead. Accordingly, a trader who wishes to continue to use GAAP year on year must therefore check the appropriate box on their self-assessment tax return each year. Businesses leaving the cash basis must revert to using GAAP
The guidance within BIM70005 to BIM70100 applies to tax years ending on or before 5 April 2024 (2023/24). For tax years beginning on or after 6 April 2024 (2024/25) you should refer to the guidance within BIM72005 to BIM72073. S25A ITTOIA 2005, S31E ITTOIA 2005, S74E ITA 2007 The cash basis is a simpler way of reporting income and expenses for income tax purposes for small businesses. It allows eligible businesses to account for business income and expenses when money is received or paid out,
Cash accounting is an optional scheme of accounting for VAT and was introduced on 1 October 1987. Its introduction was a deregulatory measure intended to ease the burdens on small businesses, especially those that provide extended credit to their customers. Since its introduction the scheme has undergone a variety of changes, some to simplify the scheme and others to counter abuse. The scheme allows businesses to account for VAT on the basis of payments made and received rather than invoices iss
S24A ITTOIA 2005, S148K ITTOIA 2005 A person must calculate profits or losses on the cash basis unless the following conditions apply: They have elected to calculate profits or losses in accordance with generally accepted accounting principles for that tax year. They are excluded from using the cash basis. Exclusions The cash basis is available for unincorporated businesses only, companies and limited liability partnerships cannot use it. In addition, the following are excluded from using th
S24A ITTOIA 2005, S31E ITTOIA 2005, S74E ITA 2007 The cash basis is a simpler way of reporting income and expenses for income tax purposes for small businesses. It allows eligible businesses to account for business income and expenses when money is received or paid out, not on the date goods or services are invoiced. So instead of preparing a balance sheet and profit and loss account, the business records only need to show money when it comes in or goes out. As receipts are recognised as income
You cannot use the Flat Rate Scheme with the Cash Accounting Scheme, but it does have its own cash based method. Read about how to use the Flat Rate Scheme, who can use it and how to apply in Flat rate scheme for small businesses (VAT Notice 733).
Chapter 17 of Part 2 ITTOIA 2005 The transitional tax adjustments described in this section are all concerned with ensuring that business income is taxed once and only once, and business expense is relieved once and only once. When not in the cash basis, a business must calculate its profits for tax purposes on the accruals basis. Except for those small businesses that opt to use the cash basis, all businesses, whatever their size, must calculate their profits on this basis as a starting point f