The cash basis was created to ease bookkeeping and self-assessment for unincorporated small businesses, such as sole traders.

Cash basis accounting enables businesses to record expenses and revenues as they get or pay for cash. This reflects their finances. You won’t have to calculate debtors and creditors, conduct an inventory, or estimate accruals and prepayments if you keep your books on a cash basis.

Most sole traders with less than £150,000 in sales can use the cash basis when filling their Self Assessment tax return. The minimum yearly income for universal credit is now £300,000. If your annual sales are over £300,000, you must switch to accrual accounting next year.

If you have many businesses and choose the cash basis of accounting for one, you must adopt it for all of them. The aggregate turnover of all your business is used to determine the cash basis’s entry and exit levels. If you’re a partner in a partnership, you must examine the controlling partner’s position (a controlling partner has more than half of the partnership’s assets) to decide if you may utilise the cash basis. HMRC’s 

Several types of businesses cannot use cash basis, including partnerships with at least one non-human partner and self-employed persons who average their profits.   However, because the cash basis of accounting isn’t the standard, you have an option to choose it. Using the cash basis requires ticking a box on the Self Assessment tax return (please note: this is different from the rental income rules). This information goes in box eight on the short self-employment sheets or box ten on the total pages.