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Should I be using “cash basis” for my sole trader business?

Self employed

What is the cash basis?

Let me explain about “cash basis”.  

Now, traditionally when you were putting together your figures for your self-assessment tax return, you would add up all of the invoices that your business has sent out to its customers during the year, and you would add up all of the invoices, expenses, receipts that you’ve had from your suppliers during the year, and that’s the figures you would declare to HMRC, regardless of whether they’ve been paid or not.

Now, the cash basis is where you declare income and expenditure based upon what’s actually been paid during the year, so it’s HMRC’s way of simplifying the process and making it a little bit easier for your self-assessment tax return to be completed.

The cash basis can make completing your tax return easier

Positives on using cash basis:

The first one is that it’s far easier to do.

The second positive is that you are only paying tax on the money that you’ve received, and this can be very handy if you’re someone who offers credit terms to your customers or you have customer who are late payers.

Negatives on using cash basis:

The first one is if you have customers that pay in advance, you will be paying tax on those because the money is in your bank account.  For instance, if a customer pays you in March but the work not done until June, you will be paying tax in one tax year with the work carried out in the next tax year.

The second one is to consider is your personal allowances. If you don’t use up your personal allowance, nothing is rolled forward until the following tax year, it’s a use it or lose it allowance.

Make sure you choose the option that doesn’t waste your allowances and is right for your business.

Look at your customers and see, do they pay you after the work is done or do they pay you before? That could be a good indication of whether the cash basis is good for you.

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