Since April 2024 the cash basis is the standard method for sole traders, and much of what the internet still says about it is out of date. Here is the current position.
Zazentax Simplification Series, Part 2 of 3 · Updated July 2026 · Reading time: about 6 minutes
It is one of the most uncomfortable questions a new sole trader asks: my customer has not paid me, so do I still owe tax on that invoice? Under the traditional accounting method the answer, surprisingly, can be yes. Under the cash basis the answer is no, and since 6 April 2024 the cash basis is the default method HMRC (His Majesty’s Revenue and Customs, the United Kingdom tax authority) assumes you are using, unless you actively choose otherwise.
That word default matters, because a great deal of guidance still circulating online describes rules that no longer exist. Before proceeding, it is worth stating plainly what changed, since knowing the current law is the difference between a correct return and an accidental overpayment.
Two Ways of Counting the Same Year
Traditional accounting, also called the accruals basis, recognises income when it is earned and costs when they are incurred, regardless of when money actually moves. If you invoice £5,000 in March and are paid in May, the £5,000 belongs to March’s accounting year. This method matches how accountants prepare formal accounts and how larger businesses must report.
The cash basis counts money only when it moves. Income is taxed when it is received, and allowable expenses are deducted when they are paid. The March invoice paid in May is taxed in the year containing May. Consequently, unpaid invoices carry no tax bill, and there is no need for the concept of bad debt relief at all: income that never arrives is simply never taxed.
Key point: An expense still has to pass the normal test. It must be incurred wholly and exclusively for the business. The cash basis changes when costs are counted, never whether they qualify.
What Changed in April 2024, and Why Old Advice Misleads
Until the 2023/24 tax year, the cash basis was an opt-in scheme fenced off by turnover limits, and it carried two penalties that made professionals wary: interest costs were deductible only up to £500, and losses were trapped, usable only against future profits of the same trade. All of that has gone. From 2024/25 onwards the turnover limits are abolished, so a business of any size may use the cash basis. The £500 interest cap is removed, so loan and finance costs are deductible in full under the normal rules. Furthermore, losses made under the cash basis can now be set against other income of the same or the previous year, exactly as accruals losses can.
The direction of the assumption also reversed. You no longer elect into the cash basis; you elect out of it. Anyone preferring traditional accounting ticks the relevant box on the Self Assessment tax return, and from 2026/27, users of Making Tax Digital (the system requiring digital records and quarterly updates through software) make the same choice within their software.
Equipment, Cars and the Two Exceptions That Matter
Under the cash basis most equipment is refreshingly simple: the cost of tools, computers or machinery is deducted in full when it is paid, and if the item is later sold, the sale proceeds are added back to income. Capital allowances, the separate relief regime for equipment, are largely unnecessary here.
Two exceptions deserve attention. First, cars: the purchase cost of a car is never deducted directly under the cash basis. Instead, a car still receives capital allowances, or alternatively the 45p flat rate per business mile covered in Part 1 of this series, in which case no separate cost of the car may be claimed. Second, land and buildings: their purchase cost is not deductible under the cash basis, and neither is the relief normally available for constructing commercial premises. A business investing heavily in property has a genuine reason to consider traditional accounting.
One further rule protects the system’s honesty. If you take goods out of the business for yourself, perhaps stock from your own shelves, the cost of those goods is disallowed as an expense. Personal consumption cannot become a tax deduction.
A Worked Year Under the Cash Basis
Omar is a self-employed electrician preparing figures for the year ended 31 March 2027. He invoiced customers £52,000, of which £46,500 was actually received by the year end. He received supplier invoices totalling £14,200 and paid £11,900 of them. He bought and paid for £3,600 of tools, drove 6,800 business miles claimed at the flat rate, and paid £780 of interest on a business loan.
His taxable trading income is calculated entirely from money that moved. Income received is £46,500. From this he deducts supplier payments of £11,900, tools of £3,600, mileage of 6,800 multiplied by 45p which gives £3,060, and the full £780 of interest, now uncapped. His taxable trading income is therefore £27,160. The £5,500 of unpaid invoices and the £2,300 of unpaid supplier bills belong to next year, when the cash actually moves.
Action required: If you switch between methods, an adjustment calculation is needed so that nothing is taxed twice and nothing escapes tax. This is a one-time exercise where an hour of professional help genuinely pays for itself.
Who Should Still Choose Traditional Accounting
The cash basis suits most small service businesses: the tax follows the bank account, the record keeping is intuitive, and slow-paying customers do not create tax bills. However, traditional accounting remains the better tool in identifiable cases. A business carrying significant stock or work in progress gets a truer profit picture from accruals. A business buying premises needs accruals to access property-related reliefs. Moreover, lenders and investors usually want accounts prepared on the traditional basis, and a limited company has no choice at all, since companies and limited liability partnerships cannot use the cash basis.
Key Takeaways
- Since 6 April 2024 the cash basis is the default for sole traders and ordinary partnerships; traditional accounting now requires a positive election on your return.
- Income is taxed when received and expenses deducted when paid, so unpaid invoices create no tax bill and bad debt relief is unnecessary.
- The old restrictions are gone: no turnover limits, no £500 interest cap, and losses can now be used against other income.
- Equipment is deducted when paid for, but cars, land and buildings are excluded, and cars instead receive capital allowances or the mileage rate.
- Stock-heavy or property-buying businesses, and anyone needing formal accounts for lenders, should weigh traditional accounting; companies cannot use the cash basis at all.
Not Sure Which Basis Your Last Return Actually Used?
The default changed, the old restrictions are gone, and switching methods needs a careful one-time adjustment. A quick review confirms you are on the right basis and not overpaying on invoices you have not even been paid for.
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