How do I record income and expenses using cash basis?
You must keep records of all business income and expenses to work out your profit for your tax return.
With cash basis, only record income you actually received in a tax year. Do not count any money you are owed but haven’t yet received.
Example: You invoiced someone on 15 March 2021 but did not receive the money until 30 April 2021. Do not record this income for your 2020 to 2021 tax return, but instead for 2021 to 2022.
You can choose how you record when money is received or paid (for example the date the money enters your account or the date a cheque is written) but you must use the same method each tax year.
All payments count - cash, card, cheque, payment in kind or any other method.
Expenses Expenses are business costs you can deduct from your income to calculate your taxable profit. In practice, this means your allowable expenses reduce your Income Tax. Only count the expenses you have actually paid. Money you owe is not counted until you pay it. Examples of allowable business expenses if you are using cash basis are:
day to day running costs, such as electricity, fuel
admin costs, for example stationery
things you use in your business, such as machinery, computers, vans
interest and charges up to £500, for example interest on bank overdrafts
buying goods for resale
You can check what else counts as an allowable expense.
For the 2013 to 2014 tax year onwards you can also choose to use the simplified expenses scheme instead of calculating expenses for:
running a vehicle
working from home
making adjustments for living on your business premises
Cars and other equipment
If you buy a car for your business, you can claim the purchase as a capital allowance (but only if you are not using simplified expenses to work out your business expenses for that vehicle).
Unlike traditional accounting, you claim other equipment you buy to keep and use in your business as a normal allowable business expense rather than as a capital allowance.
If you’re currently claiming capital allowances and want to switch to cash basis, HM Revenue and Customs (HMRC) have guidance on the changes you need to make.
Keep your records
You don’t need to send your records to HM Revenue and Customs (HMRC) when you send in your tax return, but you need to keep them in case they ask to check them.
For initial advice about Accounting and Taxation; call our team on
0203 488 7503 / 01992 236 110
or contact us by email at firstname.lastname@example.org
or via our website www.walshwestcca.com and we will help you.