Making Tax Digital · Sole traders
Cash basis and traditional accounting: choosing the right timing for your records
ONLY£15A MONTHAccounting basis determines when business income and expenses enter the accounts.
Accounting basis determines when business income and expenses enter the accounts. Cash basis became the default for eligible self-employed businesses from 2024/25, but traditional accounting remains available. Property businesses have their own rules, so the change should not be described as a single new rule for every taxpayer.
Understand the timing difference
Cash basis generally records income when received and expenses when paid. Traditional accounting recognises income and costs according to the accounting rules, which can include amounts not yet paid. An invoice date, payment date and bank posting date can therefore describe different events.
HMRC explains cash-basis income and expenses. Use a consistent approach to payment methods. A card processor collecting on your behalf can require more analysis than simply waiting for the final bank payout.
Changing basis needs transition work
Do not switch by deleting unpaid invoices or adding all outstanding receipts to the next period. Transition adjustments may be needed to prevent income or expenses being counted twice or omitted.
The best choice depends on your business, information needs and circumstances. Accounts used for finance, stock management or performance comparisons may need information beyond a cash summary. MTD reporting does not remove the need to establish the correct accounting basis first.
Worked example: an unpaid invoice
A designer issues a £2,000 invoice in March and receives payment in May. Under cash basis, the receipt normally belongs to the period containing the May payment. Under traditional accounting, the income may belong to the period in which it was earned.
Neither method allows the same income to be counted twice. A transition between methods requires a check of how that invoice was previously treated.
Reconcile receipts, not just bank payouts
A bank deposit is not always the original sale. A platform, card processor or agent may deduct fees before sending you the balance. Keep the statement showing the gross amount, deductions, refunds and final payout, then explain the difference in your records.
Cash needs the same attention. Record customer cash when received under the cash basis, even if some of it is spent before the rest reaches the bank. Banking cash already recorded as a sale is a transfer between your cash and bank records, not another sale.
HMRC's record-keeping guidance covers income and business expenses. The useful practical test is whether another person could follow a payment from the original sale to the amount received without counting it twice.
Do not use bank feeds as a reason to ignore payment accounts, credit cards, cash or payments made personally for the business. List every place where business money passes, choose the source for each type of transaction and review transfers between those sources. This turns reconciliation into a repeatable check rather than a search through several unrelated statements.
Give equipment its own review
The tax treatment of equipment depends on the accounting basis and the asset, not just its price. Under the cash basis, many business equipment purchases are deducted when paid. Cars and certain other expenditure are exceptions. Under traditional accounting, a purchase with lasting business use may instead enter the capital-allowances calculation.
HMRC's capital-allowances guide explains the available routes. Annual Investment Allowance can cover qualifying plant and machinery, subject to its conditions and limit, but it does not apply to cars. Accounting depreciation is not itself the tax deduction.
Keep the purchase invoice, date, payment evidence and any finance agreement. A finance instalment can combine capital and interest, so treating every payment as an ordinary running cost may give the wrong answer. Record private use where relevant and retain the disposal paperwork when equipment is sold or part-exchanged.
For an expensive or unusual purchase, resolve the treatment before relying on a tax estimate. A category chosen from the merchant name cannot tell you whether an item was bought outright, leased, used privately or acquired as part of a larger building project.
Where this fits into Making Tax Digital
For 2026/27, the first mandatory phase generally covers individuals whose combined qualifying self-employment and property income was more than £50,000 in 2024/25, subject to exemptions. Qualifying income normally means income before expenses. It is a different figure from taxable profit. Check the qualifying-income rules.
Once within MTD, keep the required digital records and send quarterly summaries for each relevant business. The summaries are cumulative from the start of the reporting year. They do not contain your entire personal tax position, and sending one does not itself create a quarterly tax-payment demand.
HMRC does not require accounting or tax adjustments before each quarterly update. Those adjustments and the other information needed for the annual return still have to be completed at the appropriate stage. Keep a review list so a matter deferred until year end is not forgotten. Read HMRC's quarterly-update guidance.
Software can organise the information, but the business facts remain essential. Review the figures you approve rather than assuming that a successful import has also settled every tax question.
Document the basis before importing
Confirm the method used in the previous return, check eligibility and note any change with its transition adjustments. Keep invoice and payment dates where needed. Configure imports to support the chosen method rather than assuming bank movements answer every timing question.
Take the next step
Avona.app offers a self-service route from £15/month. Bring your records together, review the figures and choose a workflow that fits your business. For professional help, discuss the scope and total price of Avona Concierge, managed by chartered accountants, before choosing a service.