Small unincorporated businesses have to choose between several different combinations of accounting methods in order to work out their profits for tax purposes.
This is a freeview ‘At a glance’ guide to the cash basis v fixed expenses.
At a glance
Two different accounting systems
There are two different ways to prepare a set of unincorporated business accounts in order to arrive at your taxable profits.
- 'Simpler accounting' or cash accounting.
- 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 (the cash basis) was introduced in April 2013 and is modified in 2024 to make it the default tax accounting method for small business.
Four different methods of claiming tax relief for deductions
Once you have chosen accounting methods (cash or accruals), 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.
- If you are adopting the 'cash basis' there are specific rules which define and restrict what expenses may be claimed.
- If you claim using the system of fixed-rate deductions instead of claiming actual expenses, and which can be used whether you are cash or accruals accounting, specific rules restrict certain claims if you are either using the cash basis or have claimed capital allowances.
- If you claim the trading allowance, you cannot claim any further tax relief for expenses, including flat-rate expenses.
- If a business has not claimed fixed-rate deductions, the rules governing deductions 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