Income Tax (Trading and Other Income) Act 2005 section 25A

Cash basis for small businesses

Section 25A allows a person carrying on a trade, profession or vocation to elect to calculate their trading profits using the cash basis rather than following generally accepted accounting practice.

• Individuals engaged in a trade, profession or vocation (whether current or former) may opt to calculate their trading profits using the cash basis instead of the accruals basis under generally accepted accounting practice.
• Chapter 3A of the Act sets out who is eligible to make this election and what the consequences of making it are.
• Where the cash basis is elected, sections 27 and 28 (which govern how receipts and expenses are recognised under generally accepted accounting practice and capital allowances) and section 30 (which deals with animals kept for trade purposes) do not apply.
• The cash basis means profits are calculated by reference to cash received and cash paid out, rather than on an accruals basis where income and expenses are matched to the period in which they are earned or incurred.