Swapping to the cash basis from the accrual basis
Most people using untied follow the money - income is when the money is received, and expenses are when it is paid. This is known as the cash basis, and is the default that HMRC now use for self-employed people.
You may previously have used what's known as the accrual basis, which matched income and expense to when the underlying activity happened. Here's how to move between them. It may look complicated, but is straightforward.
Core principles of moving - transitional adjustments
HMRC allows for transitional adjustments when you switch accounting methods to make sure that:
- Income is only taxed once
- Expenses are only relieved once
These adjustments are made once, in the first year you use the cash basis.
At a high level, the rules do three things:
- Stop income already taxed under accrual accounting being taxed again when cash is received
- Stop expenses already claimed being deducted again when paid
- Allow relief for items not yet deducted (such as stock or unrelieved capital allowances)
You don’t need to manage these rules year after year. They apply only at the point you switch.
Example: switching to the cash basis
Carolina runs a small catering business and prepares her accounts to 5 April each year, in line with the tax year.
Up to and including the year ended 5 April 2026, Carolina used accrual accounting. Her accounts included:
- £3,000 still due from a customer for an event that happened in March 2025
- £1,200 of food supplies ordered before 5 April 2026 but paid for after the year end
- £800 of unused ingredients treated as closing stock
- £2,000 remaining in her capital allowances pool for kitchen equipment
For the 2026/27 tax year, Carolina switches to the cash basis.
Here’s how the transitional adjustments apply.
Income already taxed
Carolina receives the £3,000 payment from her customer in May 2026.
Under normal cash basis treatment, this would be income in 2026/27. However, the income was already taxed in her 2025/26 accounts under accrual accounting.
A transitional adjustment therefore removes £3,000 from her 2026/27 cash basis income, so it is not taxed twice.
Expenses already relieved
Carolina pays £1,200 for the food supplies in May 2026.
Under the cash basis, expenses are normally claimed when paid. However, Carolina already received tax relief for these supplies in her 2025/26 accrual accounts.
As a result, the £1,200 payment is ignored as an expense in 2026/27, and her expenses are reduced by £1,200 as part of the transitional adjustments.
Closing stock
The £800 of unused ingredients had not yet received any tax relief, as they were treated as an asset under accrual accounting at 5 April 2026.
Under the cash basis, stock is treated as an expense when purchased.
Carolina therefore increases her expenses by £800 in 2026/27 as a transitional adjustment, ensuring she receives tax relief for this cost.
Capital allowances
Carolina still has £2,000 of unrelieved capital allowances at 5 April 2026.
When moving to the cash basis, any remaining balance that has not received full relief is treated as if it were a cash purchase.
Carolina deducts the £2,000 as an expense in 2026/27 and stops claiming capital allowances for those items going forward.
For many small businesses, this final adjustment will not apply. The annual investment allowance and small pools allowance often mean there is no remaining capital allowance balance. This treatment does not apply to cars, land, or buildings.
Transitional adjustments in untied
These transitional adjustments can be entered as manual transactions.