Cash basis: the sole trader's standard, explained
Does MTD apply to you yet?Cash basis is the standard way sole traders record income and expenses: money counts when it moves. Income lands in your books when the customer pays, not when you send the invoice, and an expense counts when you pay it. In HMRC's own words, you'll not need to pay Income Tax on money you have not yet received.
How it works
With cash basis you only record income or expenses when you receive money or pay a bill. No debtors, no accruals, no year-end adjustments: the business's books look like its bank account. For most one-person businesses it's both simpler and truer to life.
The unpaid invoice rule
This is the part that saves real stress. That £3,000 invoice you're still chasing at year end? It isn't taxable income yet. You owe nothing on it until the money arrives, which means a slow-paying customer can't create a tax bill for cash you don't have. When it lands, it counts, in whichever tax year that happens.
Buying equipment
Under cash basis, most equipment is just an expense when you pay for it: tools, machinery, even a van, claimed in the year of purchase rather than trickled through capital allowances. Cars are the exception, they keep their own rules. It's one of cash basis's quiet advantages for tradespeople with real kit costs.
Who it's for
Sole traders and partnerships without corporate partners. Limited companies can't use it. Businesses that hold a lot of stock or run on credit sometimes prefer traditional accounting, which recognises invoices when issued; that's a conversation for an accountant, and a good one to have if your setup is unusual.
Quick answers
I invoiced in March but got paid in May. Which year is it taxed in?
The year you were paid. Under cash basis income counts when the money arrives, so a March invoice paid in May belongs to the new tax year.
Is this what SoleTax uses?
Yes. It's why the app splits received from outstanding: received money is income, outstanding invoices aren't taxable yet, and the tax estimate is built on the money that's actually landed.
Do I have to use cash basis?
It's the standard method for sole traders. Traditional accounting still exists, and suits some businesses, for example those carrying a lot of stock.
Can a limited company use it?
No. Cash basis is for sole traders and partnerships without corporate partners.
Get all of this handled for you
Snap receipts as you get them. Drive like you always do. Invoice from your phone. SoleTax turns all of it into MTD-ready digital records, and shows the tax building as you go. 14 days free, no card needed.
Join the betaSources: gov.uk cash basis guidance and HMRC helpsheet HS222, how to calculate your taxable profits. Checked on 4 July 2026.