Cash basis

What basis to use when preparing your self-employed accounts?

You can choose between simpler accounting (or Cash basis) or Generally Accepted Accounting Practice (GAAP) accounting (or Accruals basis).

Cash basis

  • The business results are based on cash receipts less business payments.
  • You do not have to include stock, work in progress or bad debts.
  • Adjustment are required where you change from one basis to the other.
  • There are some restrictions on what expenses can be claimed.
  • There are special rules for claiming capital expenses.
  • A person cannot start to use the cash basis if their business receipts exceed “relevant maximum” limits. For 2017/18 these are £300k if claiming Universal Credit or £150k otherwise. The limits for 2016/17 are £166k for Universal Credit claimants or £83k otherwise.
  • Once you are using cash basis you must change back to accruals basis once your business receipts exceed £300k for 2017/18 (£166k 2016/17).
  • These maximums are the total of your combined business’ receipts calculated on a cash basis.
  • Losses cannot be carried backwards or sideways.
  • Loan interest paid for any reason can be claimed, up to £500 pa.
  • If your accounts are simple and you have a personal mortgage or other non-business loan it may be worth opting for cash basis to claim the loan interest deduction which will not otherwise be due.

Accruals basis.

This is the basis most accountants will use to prepare your business accounts.

  • The business results are based on invoice dates less bill dates.
  • Adjustments are required for stock, work in progress or bad debts.
  • Adjustment are required where you change from one basis to the other.
  • Losses can be carried forwards, backwards or sideways.
  • Loan interest paid must relate wholly or partly for business purposes. You can claim that proportion relating to the business.

Published 20 November 2017.

Updated 20 November 2017.