Cash Basis Allowable Expenses

Under the cash basis you deduct an expense in the tax year you pay it, not the tax year you are billed for it. The ordinary wholly and exclusively test still decides whether an expense is allowable at all. What the cash basis changes is timing, plus capital spending, which comes off as a normal expense when paid instead of going through capital allowances.

That is the whole page in three sentences. The rest of it is the detail that moves money: which capital spending is quietly excluded, what happened to the old interest cap, why there is no stock adjustment, and where the timing rule bites hardest.

This page is about when a cost comes off and what the cash basis changes about it. If your question is what is deductible in the first place, our allowable expenses checklist for sole traders is the page for that, and it applies identically whichever basis you are on. For the regime itself, who it applies to and how you leave it, see the cash basis.

The Test That Does Not Change: Wholly and Exclusively

Start here, because it is the thing people most often assume the cash basis relaxes. It does not.

A cost is deductible in computing trading profit only if it is incurred wholly and exclusively for the purposes of the trade. That rule sits at ITTOIA 2005 s.34 and it applies to a cash basis trader in exactly the same terms as to a trader on traditional accounting. Nothing in the cash basis provisions touches it.

So the ordinary disallowables are still disallowed. Business entertaining is not deductible. Your own drawings are not an expense. Clothing that is not protective or a uniform is not deductible, however strictly the job requires you to look smart. A fine or a penalty is not deductible. Private use still has to come out, and where a cost has a genuine dual purpose it is apportioned on a reasonable basis rather than allowed in full because the money left the business account.

That last point is where the cash basis misleads people. Because the cash basis tracks the bank, it is tempting to treat the bank statement as the expense schedule. It is not. Money leaving the business account is a necessary condition for a cash basis deduction, never a sufficient one. A transfer to your personal account is not an expense. A loan repayment is not an expense (the interest element is, the capital element is not). A payment for something on the s.33A excluded list is not an expense. The payment test sits on top of the wholly and exclusively test, not instead of it.

The Test That Does Change: Paid, Not Incurred

On traditional accounting, an expense belongs to the period it relates to. The bill is matched to the work, the insurance is spread across the policy year, and whether you have actually paid is a balance sheet question rather than a profit question.

On the cash basis, none of that machinery runs. A cost is deducted when the payment is made. Practically, that means:

• A supplier invoice unpaid at 5 April gives you no deduction this year. It will give you the deduction next year, when you settle it.
• Prepaid costs are deducted in full when paid. Twelve months of public liability insurance paid in one go in February is a February deduction, not a two-month slice.
• The payment date is the date the money moves, not the date you agreed to pay. A cheque that clears after 5 April, a card payment that posts after the year end, a failed direct debit retaken in the new year: all of them fall in the later year.
• There is no accruals or prepayments schedule at the year end. Nothing to spread means nothing to schedule.

The effect is a permanent lag. A trade that pays merchants on 30-day terms has roughly a month of costs sitting in the following tax year compared with accruals, in every year, for the life of the business. Over the whole life of the trade the same total is deducted either way. The difference is which year each slice lands in, and for a trader whose profit sits near a rate boundary that is a real number.

Where the Line Falls, Trade by Trade

Cash basis: deducted when paid	Traditional accounting (accruals): deducted when incurred
A joiner's £3,000 timber invoice dated 20 March, paid 6 May: deducted in the later tax year	Deducted in the year of the invoice, whether or not it has been paid
A cafe's £1,400 espresso machine: the full cost is an allowable expense when paid, with no pool and no annual investment allowance	Capital: annual investment allowance or writing down allowance, inside a pool
A driving instructor's car: not deducted as an expense, it stays in the capital allowances regime (CAA 2001 s.1A(4))	The same, capital allowances with the rate set by CO2 emissions
A landscaper's £600 of stock bought in March and unsold at the year end: deducted in full when paid, with no closing stock adjustment	Closing stock is carried forward and the cost is not deducted until the item sells
A mechanic's £900 of interest on a business loan: deductible in full, because the old £500 cap was abolished	Deductible in full
A salon's purchase of the business it took over: not deductible on either basis, because ITTOIA 2005 s.33A excludes business acquisition and disposal costs	Not deductible
A cleaner's annual van insurance of £780 paid in one instalment in March: deducted in full in March	Apportioned across the policy period, so only the March slice lands this year

Read the left column as one rule with one exception. The rule is that money out equals deduction. The exception is that some categories of capital spending never become a deduction at all, and the next section is the one to read carefully.

Capital Spending: Deducted When Paid, With No Pool and No AIA

This is the part that genuinely surprises people, and it is more generous than the phrase "simplified basis" suggests.

CAA 2001 s.1A says a person calculating profits on the cash basis is not entitled to any allowance, and not liable to any charge, under the Capital Allowances Act, except as provided by subsections (4) and (7). Subsection (4) is the car carve-out. So for a cash basis trader the capital allowances system is switched off almost entirely.

In its place, ITTOIA 2005 s.33A allows capital expenditure to be deducted as an ordinary business expense, when it is paid, unless the expenditure falls into one of the excluded categories. The practical result for the ordinary kit a small business buys is simple to the point of feeling wrong:

• A £1,400 espresso machine is a £1,400 expense in the year the cafe pays for it.
• A £950 laptop is a £950 expense in the year it is paid for.
• An £18,000 van is an £18,000 expense in the year it is paid for.
• A £3,200 set of workshop tools is a £3,200 expense in the year they are paid for.

No pool. No writing down allowance carrying the cost forward at 18% or 14% a year. No annual investment allowance claim, because there is no annual investment allowance available at all. Do not describe this as "claiming AIA on the cash basis". It is a different mechanism with a different consequence on disposal, and calling it AIA is how people end up trying to compute a balancing charge against a pool that has never existed.

Two consequences follow from the mechanism.

Disposal comes back in as a receipt. Because the whole cost was deducted as an expense, selling the asset later brings the proceeds in as an ordinary business receipt in the year the money is received. There is no disposal value, no balancing allowance and no balancing charge, because there was no pool. Sell the old saw for £300 and you have £300 of income.

Finance follows the payments. If the van is bought on hire purchase, the deduction on the cash basis follows the payments actually made in the year rather than landing in a single lump at the point of acquisition. That is a meaningful difference from the accruals treatment, where the full capital cost typically enters the allowances system at the outset.

What Stays Capital: The s.33A Excluded List

This is the most valuable part of the page, because the list is wider than most people assume, and a trader who deducts something on it has a real problem rather than a presentational one.

Under s.33A, no deduction is allowed for capital expenditure on or in connection with:

• A car, taking the meaning it has in Part 2 of the Capital Allowances Act 2001. This is the big one, and it is the only category that has somewhere else to go: cars remain inside capital allowances under s.1A(4).
• Land, including an interest in or right over land.
• Buildings, including a part of a building, and any asset that is incorporated into or fixed to a building.
• Assets that are not depreciating assets. Broadly, something with no finite useful economic life falling away.
• Financial assets, such as shares, other securities and loans made to third parties.
• Non-qualifying intangible assets.
• The acquisition or disposal of a business or part of a business. Buying a going concern, a client list, a round or the goodwill of a trade sits here, and so do the costs incurred in connection with that transaction.

Where an item is on that list, the cash basis gives you nothing. It is not a deduction now and it is not a deduction later, and in most cases it is a capital gains tax matter on eventual disposal rather than an income tax matter at all.

The categories that catch people out in practice are the last two. A trader who buys a small competitor's customer list for £12,000 and pays for it in the year has an intuitive feeling that £12,000 left the business so £12,000 is deductible. It is not, and the exclusion is express. Equally, a trader who buys the freehold of a workshop, or who pays for a permanent extension to one, has spent money on land and buildings and has spent it outside the cash basis deduction entirely.

The building exclusion has a soft edge worth knowing. Expenditure on an asset incorporated into or fixed to a building is excluded, but not everything a business puts inside a building is fixed to it. A free-standing oven wheeled into a kitchen is plant; the ductwork built into the wall is part of the building.

Interest and Finance Costs: The £500 Cap Is Gone

If you have read anything about cash basis expenses written before April 2024, it almost certainly told you that interest deductions were capped at £500 a year. That cap no longer exists.

The restriction lived at ITTOIA 2005 s.51A. Open that section today and the text is a row of dots, with an amendment note recording that it was omitted for 2024-25 and subsequent tax years by Finance Act 2024 Schedule 10, paragraphs 7(a) and 47. Interest and finance costs on the cash basis are now deductible under the ordinary wholly and exclusively rules, exactly as they are on traditional accounting.

The practical consequence is larger than the repeal of one small number suggests. For a trader with a £60,000 business loan, or a plant finance facility, or a business overdraft carrying real charges, the £500 cap was frequently the single strongest reason to elect out of the cash basis into accruals. That reason has gone. A mechanic paying £900 of loan interest in the year deducts £900, not £500.

Two points still apply. First, timing: like every other cash basis expense, interest is deducted when it is actually paid, so interest rolled up and unpaid at the year end is next year's deduction. Second, the wholly and exclusively test still governs the borrowing itself. Interest on money borrowed for the trade is deductible; interest on money borrowed to fund private spending is not, and mixing the two in a single facility creates an apportionment question.

Losses: The Restriction Is Gone Too

The same Finance Act schedule repealed the other old reason to avoid the cash basis. ITA 2007 s.74E, which blocked sideways and carry-back relief for a loss computed on the cash basis, was omitted from 6 April 2024 by paragraphs 8(a) and 47. A cash basis trading loss now qualifies for the ordinary loss reliefs, subject to the general rules and caps that apply to every trader.

This matters to an expenses page for one reason: deductions can now take you below zero usefully. A year in which you pay for a van, a machine and twelve months of insurance can produce a loss under the cash basis precisely because the whole cost lands at once, and that loss is now relievable rather than stranded. Our page on cash basis sole trader losses goes through how the reliefs work.

Stock, and Why There Is No Year-End Adjustment

On traditional accounting, stock you have bought but not sold by the year end is carried forward, and its cost does not reach your profit figure until the item sells. That is why a retailer counts stock on the last day of the year.

On the cash basis there is no such adjustment. The deduction follows the payment, so stock paid for in the year is deducted in the year, sold or not. A landscaper who buys £600 of turf and shrubs in March and still has them stacked in the yard at 5 April has a £600 deduction for that year.

That is the whole principle, and this page will not take it further than that. Work in progress on longer jobs and the mechanics of valuing part-finished work raise questions this page does not have a settled position on, and a guess dressed up as a rule is worse than a gap honestly flagged. If your trade carries meaningful work in progress, or you need absorption costing to drive a tax figure, that is a conversation to have before the year end rather than after it.

Worked Example One: £5,200 of Unpaid Supplier Invoices at 5 April

Dan runs a small groundworks business as a sole trader. For the year to 5 April 2027 his takings, received in the bank, are £62,000. His supplier costs billed during the year total £24,000, of which £5,200 is still unpaid at 5 April 2027 and is settled on 28 April, three weeks into the new tax year.

On traditional accounting, all £24,000 of costs belong to the year to 5 April 2027, because that is when they were incurred. His profit is £62,000 less £24,000, so £38,000. The unpaid £5,200 sits as a creditor on the balance sheet.

On the cash basis, only the £18,800 he has actually paid is deducted. His profit is £62,000 less £18,800, so £43,200. The £5,200 becomes a deduction in 2027/28 instead.

The gap is £5,200 of deduction moving one year later. At a marginal rate of 20% income tax plus 6% Class 4 National Insurance, that is roughly £1,350 of tax paid a year earlier than it otherwise would be. Not lost, but paid early.

Now run it the other way, because this is the lever the cash basis actually gives you. If Dan settles the £5,200 on 2 April instead of 28 April, the deduction lands in 2026/27 and his profit for that year is £38,000. Same supplier, same money, same invoice, twenty-six days apart. On traditional accounting that choice would change nothing at all; on the cash basis it moves £1,350 of tax by a year. The payment has to be real and actually made, and the point only works in your favour if the earlier year is the year you would rather have the deduction in. A trader whose next year will be much more profitable should be doing precisely the opposite.

Worked Example Two: A £1,400 Machine In, Then £400 Out

Marta runs a cafe. In August 2026 she buys a refurbished espresso machine for £1,400 and pays on collection.

Year one, 2026/27. Under s.33A the whole £1,400 is an ordinary allowable expense of 2026/27, because a coffee machine is not on the excluded list and she paid for it in the year. There is no pool, no writing down allowance and no annual investment allowance claim. If her profit before this was £31,000 it is now £29,600, and at basic rate income tax plus Class 4 the deduction is worth a little over £360 of tax in that one year.

Year three, 2028/29. She upgrades and sells the old machine for £400. Because she deducted the full cost as an expense, the £400 is simply a business receipt in the year she receives it. There is no disposal value to deduct from a pool and no balancing charge to compute, because no pool was ever created.

Net across the period she has deducted £1,400 and brought back £400, leaving £1,000 of relief, which is what the machine actually cost her business. On traditional accounting the same £1,400 would have entered the plant and machinery pool, most likely relieved in full in year one by the annual investment allowance (£1,000,000 a year), with the £400 disposal then reducing the pool and potentially creating a balancing charge. The destination is similar; the route, the paperwork and the disposal mechanics are not. Our page on sole trader capital allowances handles the accruals side properly, including the writing down rates and the car treatment.

What People Get Wrong

"Everything that leaves the business account is an expense"

The most expensive error on this page. Payment is the timing test, not the allowability test. Drawings, loan capital repayments, private spending and anything on the s.33A excluded list all leave the account and none of them is deductible. The wholly and exclusively test at s.34 runs first, and the payment test then decides the year.

"I claimed the annual investment allowance on my cash basis accounts"

There is no annual investment allowance to claim. CAA 2001 s.1A switches capital allowances off. The figure may well be identical in year one, but the label is wrong and it will produce the wrong answer the moment the asset is sold, because people who think they have a pool then try to compute a balancing charge against it.

"I deducted the cost of buying the business"

Excluded by s.33A in express terms, along with the costs incurred in connection with the acquisition or disposal. This is the exclusion that produces the largest single misstatements, because the sums are large and the money genuinely left the bank. It is capital expenditure and it stays capital.

"Interest is capped at £500 on the cash basis"

Repealed from 6 April 2024. If a source still says this, check the date on it and then check s.51A on legislation.gov.uk, where the section now reads as a row of dots.

"I deducted the car"

A car is the one category that is both excluded from the s.33A expense deduction and preserved inside capital allowances. Deducting the purchase price of a car as an expense is a straightforward error, and it is a large one because cars are expensive. Either claim capital allowances by CO2 band, or use HMRC's approved mileage rates of 55p for the first 10,000 business miles from 6 April 2026 and 25p thereafter, but not both for the same vehicle.

"I adjusted for closing stock"

No adjustment is needed and making one understates your deduction. Stock paid for is deducted when paid.

"My VAT scheme and my income tax basis are the same decision"

They are not, and they are not even the same tax. The VAT Cash Accounting Scheme has its own turnover thresholds and is open to limited companies. The income tax cash basis has no thresholds at all and is closed to them. You can be on one, both or neither.

"The cash basis means I can use flat rates for everything"

Simplified expenses are a separate optional regime, not a feature of the cash basis, and the flat rates change. Check the current figures on HMRC's simplified expenses guidance rather than working from a rate you remember.

Where to Go Next

• Allowable expenses for sole traders: what is deductible in the first place, category by category.
• The cash basis: who it applies to, why it is the default, and how to elect out.
• Cash basis vs accruals for sole traders: the same trader's profit worked under both, plus transition adjustments.
• Sole trader capital allowances: the accruals treatment, the rates, and the cash basis car rule.
• Cash basis sole trader losses: the reliefs now the restriction has gone.