Small unincorporated businesses have to choose between several different combinations of accounting methods in order to work out their profits for tax purposes. 

Two different accounting systems

There are two different ways to prepare a set of accounts in order to arrive at your taxable profits for tax purposes.

1. 'Simpler accounting' or cash accounting.
2. Accruals basis accounting. This is accounting following Generally Accepted Accounting Principles (GAAP).

We refer to:

• 'Simpler accounting' as the 'cash basis'.
• 'GAAP accounting' as the 'accruals basis'.

Simpler accounting was introduced in April 2013.

Four different methods of claiming tax relief for deductions

Once you have chosen accounting methods, the next step is to work through the different rules governing what expenses you can claim as a deduction from business income. Some of these rules become mandatory if you are adopting the cash basis. Some may be adopted voluntarily so you can in certain circumstances be free to 'mix and match'.

Each business is different and so the right combination of claims and reliefs depends on you.

1. If you are adopting the 'cash basis' there are specific rules which define and restrict what expenses may be claimed.
2. If you claim using the system of fixed-rate deductions, which may be used instead of claiming actual expenses and can be used whether cash or accruals accounting, specific rules restrict certain claims if you are using the cash basis or have claimed capital allowances.
3. If you claim the trading allowance, you cannot claim any further tax relief for expenses, including flat-rate expenses.
4. If a business has not claimed fixed-rate deductions, the rules governing deduction follow general principles. Expenses must be incurred wholly and exclusively for business purposes.

Getting started - what is the cash basis?

Which system for me? See Cash or accruals accounting toolkit

Which expenses for me? See Flat rate expenses or actual cost toolkit

Small amounts of income or low expenses? See Trading Allowance