Two sellers can sell the same goods, pay the same fees and still report different profit for the same tax year, purely because of the accounting method they use. That is not a loophole. It is timing. One method counts money when it moves; the other counts it when the sale or bill happens. For a small UK reseller, the choice affects how much record keeping you do, what you can deduct for equipment, how you handle stock you have bought but not sold, and how painful it is to change later.
Since 6 April 2024 the starting point is different from what many older guides say. GOV.UK states that from that date cash basis became the default method of accounting for eligible sole traders, so you now opt out of it rather than opt in. This guide explains both methods using HMRC's own pages, works a full example with illustrative numbers, and sets out how to decide. It is about Income Tax for sole traders and partnerships. Companies are covered by different rules.
The short version
- Cash basis records income when you receive money and expenses when you pay them. Traditional accounting records them when you invoice or are billed, and needs year-end figures for stock, money owed and money you owe.
- Cash basis has been the default for eligible sole traders and partnerships without corporate partners since 6 April 2024. Limited companies cannot use it.
- Before 6 April 2024 you could only use it with turnover of £150,000 or less. HMRC's Agent Update says the upper turnover limit, the loss restrictions and the interest restriction were removed from the 2024 to 2025 return.
- Under cash basis you deduct what you pay for goods bought for resale, with no separate stock valuation. Under traditional accounting you value closing stock.
- Equipment is an ordinary expense under cash basis, except cars, which use capital allowances. Under traditional accounting equipment goes through capital allowances.
- Switching can create one-off adjustments. A positive adjustment on leaving cash basis is normally taxed over 6 years, according to HMRC's helpsheet.
1. The two methods in plain terms
HMRC's helpsheet HS222 puts the difference in one line each. With cash basis, you record income when you get it and expenses when you pay them. With traditional accounting, income is recorded when you invoice customers, and expenses when you receive a bill, with expenses belonging to the period they relate to and costs that cover several periods spread across them.
GOV.UK's cash basis overview adds the consequence that matters for tax: because your records decide your profit, you do not pay Income Tax on money you have not yet received. Traditional accounting can tax you on a sale that you have made but not yet been paid for. HMRC's Business Income Manual says that under cash basis, because receipts and expenses are recorded when money moves, a business does not account for stock, debtors, creditors or work in progress.
Traditional accounting asks for more. The GOV.UK page on self-employed records lists what you need under it: money owed to you that you have not yet received, money you have committed to spend but have not paid (such as an unpaid invoice), the value of stock and work in progress at the end of the accounting period, year-end bank balances, how much you invested in the business, and how much you took out for your own use. You must also say on your Self Assessment return that you used traditional accounting.
The GOV.UK overview says traditional accounting may suit complex businesses, such as those with high levels of stock, or businesses that need finance. The finance point is worth a pause: HMRC's cash basis page says lenders may ask for accounts drawn up the traditional way.
2. What changed on 6 April 2024
If you read an older article, it may say you can use cash basis only if your turnover is £150,000 or less. That was true before 6 April 2024. GOV.UK's page on the earlier rules says sole traders and partnerships with turnover of £150,000 or less could use it, with multiple businesses judged together, and that a business that grew could stay in the scheme up to £300,000 of turnover a year before having to switch. The same page states: "From 6 April 2024, cash basis became the default method of accounting." Before then it was a scheme you chose to use.
HMRC's Agent Update issue 128 describes the changes in the other direction. Businesses that want traditional accruals accounting, or are excluded from cash basis, must opt out on their 2024 to 2025 and later Self Assessment returns. It says the restrictions on loss-making businesses were removed from that return, the restriction on interest payments was removed, and the previous upper turnover limit was removed. It also says the changes apply to trading income and that no changes were made for property businesses.
The older helpsheet, for the year to 5 April 2024, still shows the old £500 limit on interest and similar finance costs under cash basis. That is the old rule. If you use an older template or checklist, check it does not carry that limit forward. The practical effect of the changes is that for a growing reseller the "outgrowing" cliff no longer applies, so the decision now rests on fit rather than turnover.
Worth remembering: When two HMRC documents seem to disagree, check the tax year each one is written for. The helpsheets and tax return notes are published per year.
3. Who can use cash basis
GOV.UK's eligibility page says sole traders and partnerships with no corporate partners may use it. If you have more than one business, you can choose cash basis or traditional accounting for each separately. These cannot use it:
- Limited companies and limited liability partnerships.
- Partnerships with one or more corporate partners.
- Lloyd's underwriters.
- Farming businesses with a current herd basis election, and farming or creative businesses with a fluctuating profit averaging claim.
- Businesses that claimed business premises renovation allowance in the previous 7 years.
- Businesses carrying on a mineral extraction trade.
- Businesses that have ever claimed research and development allowance.
For nearly every small eBay reseller none of that applies, which is why the real question is which method is better for you. The page adds that some businesses that could use cash basis might choose traditional accounting because it lets them use different profit rules, for example dealers in securities or ministers of religion. Those are not reseller concerns.
If you are still deciding between trading as yourself and forming a company, note that the company route removes cash basis entirely. Our guide to sole trader or limited company covers the wider picture.
4. Stock, equipment and what you can deduct
Stock
For a reseller this is the most important difference.
- Cash basis: you deduct the amount you pay for goods bought for resale. HMRC's helpsheet lists the amount paid for goods bought for resale as the allowable cost under cash basis, its Business Income Manual says there is no need to account for stock, and the self-employment notes say that if you use cash basis you do not need to make adjustments for opening and closing stock.
- Traditional accounting: records must include the value of stock at the end of the accounting period. The helpsheet says cost of sales is worked out on a working sheet using purchases and stock, and it warns not to include items received in the last accounting period that you paid for in this one.
The consequence: under cash basis, buying a large batch of stock just before 5 April brings the whole cost into that year's expenses, lowering that year's profit, even if you sell none of it until next year. Next year's sales then arrive with no matching cost. It is timing, not a saving, but a business that is building up stock can see lumpy profit figures. If you dropship, you usually buy after the customer pays, so the difference is small.
Equipment and other capital items
HMRC's pages state that under cash basis equipment you buy to keep and use in the business is claimed as an ordinary allowable expense, not through capital allowances, and that cars follow different rules: you can claim the purchase of a car as a capital allowance, but only if you are not using simplified expenses for that vehicle. The helpsheet lists exceptions where the capital deduction is not allowed under cash basis, including buying or disposing of a business, education or training, assets that are not depreciating assets, assets not acquired for continuing use in the trade, land, non-qualifying intangible assets and financial assets. It describes an asset that is not a depreciating asset as one with a useful life that will not end, or one that will not decline in value by 90% or more within 20 years of the expenditure.
Under traditional accounting you claim capital allowances on equipment such as tools and cars instead. GOV.UK's office costs page says computers and printers are expenses under cash basis and capital allowances under traditional accounting, and that depreciation and losses on asset sales are not deductible. For a reseller who buys a laptop, a label printer or a shelving system, cash basis usually means claiming the cost in the year you pay. Our guide to allowable expenses, line by line goes through the rest.
Bad debts and VAT
GOV.UK's legal and financial costs page says bad debts can be claimed only under traditional accounting, because under cash basis you only record income you have actually received. On VAT, HMRC's cash basis pages say a VAT-registered business may record income and expenses either excluding or including VAT, but must treat both the same way. If you include VAT, VAT you pay HMRC is an expense and VAT repayments are income. Cash basis does not change how VAT itself is accounted for, which is a separate subject covered in our VAT guide for UK eBay dropshippers.
5. The same year under both methods
These numbers are invented to show how the methods differ and are not typical of any seller. Take a reseller's first year of trading, so there are no opening balances. Over the tax year:
- Sales made: £30,000. At 5 April, £1,500 of that has been earned but not yet received (for example, funds still held before payout).
- Goods bought for resale: £20,000. Of that, £1,000 is still unpaid to the supplier at 5 April, and £2,000 worth of stock is unsold at 5 April.
- Other business costs (fees, postage, software), all paid: £3,000.
| Line (illustrative) | Cash basis | Traditional accounting |
|---|---|---|
| Income counted | £28,500 (30,000 less 1,500 not yet received) | £30,000 |
| Goods cost counted | £19,000 (20,000 less 1,000 unpaid) | £18,000 (20,000 bought less 2,000 closing stock) |
| Other costs | £3,000 | £3,000 |
| Profit | £6,500 (28,500 - 19,000 - 3,000) | £9,000 (30,000 - 18,000 - 3,000) |
The £2,500 gap is made up of three timing items: £1,500 of income not yet received (counted only under traditional), £2,000 of closing stock (reduces cost only under traditional), and £1,000 owed to the supplier (counted as a cost only under traditional). Added up, that is +1,500 +2,000 -1,000 = £2,500 more profit under traditional accounting. In later years the differences reverse as the unpaid amounts are paid and the stock is sold, so the tax is deferred under cash basis rather than avoided. A business that is shrinking, or one whose stock is falling, can see the opposite.
The worked example also shows the workload. The cash basis column needs only your bank, payout and supplier payment dates. The traditional column needs a list of who owes you, who you owe and a stock count at 5 April, every year.
The eBay timing question
HMRC's cash basis pages say income is recorded when it is received, giving examples such as when it reaches your account, and its manual says a business can choose when income is treated as received and expenses as paid, provided it applies the choice consistently. The pages I read do not address marketplace payouts specifically, such as whether the date eBay collects the buyer's payment or the date the payout reaches your bank counts as receipt. Pick one approach, apply it every year, and ask an accountant to confirm it suits you. Our guide to how eBay pays you explains why those two dates differ.
6. Losses and interest
HMRC's older manual overview (BIM70005, for years to 5 April 2024) says under cash basis a loss could be relieved only against later profits of the same trade (and, on cessation, against the final year and the three before). HMRC's Agent Update says the restrictions on loss-making businesses were removed from the 2024 to 2025 return. The overview page of the manual section for periods from 2024 (BIM72005) does not describe the new loss rules, so for the detail of how a loss can be used, read HMRC's helpsheet on trading losses (HS227) or ask an accountant before you rely on a loss claim. The older limit on interest was £500; HMRC says the restriction was removed from the same return.
New sellers sometimes make a loss in the first months because they have bought stock and equipment before selling much. Under cash basis, those payments land in the year you make them, which can make a first-year loss larger than it would be under traditional accounting, where closing stock reduces the cost. That is another reason to understand which method you are on before you read your first set of figures.
7. Switching methods
Opting out of cash basis
The Business Income Manual says the election to leave cash basis is made using the checkbox on the Self Assessment return, and that a trader who wants to stay on generally accepted accounting principles must tick the box on the return each year. If the box is not ticked, the business stays on cash basis. HMRC's Agent Update says the opt-out is made on the 2024 to 2025 and later returns. GOV.UK says users of traditional accounting must state on the return that they used it.
Leaving cash basis
The helpsheet says you work out an overall adjustment using a working sheet. A negative adjustment is an allowable expense in the current period. A positive adjustment is treated as business income, called adjustment income, and is normally taxed over 6 years starting in the year you leave. The helpsheet points to a worked example in the Business Income Manual (paragraph 70071). Because the adjustment is worked out from your own position at the switch, a stock-heavy business should get help before leaving.
Moving to cash basis
If you are moving the other way, the helpsheet lists one-off adjustments. Customer debts from last year that you were taxed on and are now paid are deducted from turnover. Supplier debts that got tax relief last year but are paid this period are deducted from expenses. Stock held at last year's accounting date that got no tax relief is added to this period's expenses. Customer payments received in advance that were not taxed are added to turnover, and supplier payments made in advance without relief are added to expenses. Remaining capital allowance balances on fully paid equipment, other than cars, are added to expenses. If this is your first year of self-employment income, no adjustments are needed. That is the practical case for most new sellers: you start on the default, with nothing to unwind.
8. How this interacts with Making Tax Digital
If you fall under Making Tax Digital for Income Tax, the method you pick affects the work in the software. HMRC's page on adjusting self-employment income says accounting adjustments, such as splitting a prepayment or recording an accrual, apply only if you use traditional accounting, not the default cash basis. Its examples are a £1,200 annual insurance premium paid in January, which would be split £300 into the first tax year and £900 into the next, and consultancy services received in March 2026 but not yet invoiced, which can be recorded in 2025 to 2026. Under cash basis you record the £1,200 when you pay it and do nothing more.
That makes cash basis the lighter option for MTD purposes, with fewer year-end adjustments to make after the fourth quarterly update. Our guide to Making Tax Digital for Income Tax gives the start dates and quarterly deadlines, and the choice of method should be settled before your first quarterly update, not after.
9. How to decide
| Your situation | Likely fit | Why |
|---|---|---|
| Dropshipper or low-stock reseller, new or small | Cash basis (the default) | Little stock and few unpaid balances, so the two methods give similar results and cash basis needs fewer records |
| Holds a lot of stock, buys in big batches | Consider traditional | HMRC says traditional can suit high levels of stock; cash basis can produce uneven profits |
| Needs a loan or finance | Ask the lender; traditional may be requested | HMRC's page says lenders may ask for accounts drawn up the traditional way |
| Plans to incorporate soon | Cash basis now, but plan the switch | Companies cannot use cash basis, so a switch of basis comes with the change |
| Has equipment to buy | Cash basis often simpler | Equipment is generally an expense when paid, rather than a capital allowance claim |
| Wants minimal work under Making Tax Digital | Cash basis | Accounting adjustments apply only under traditional accounting |
The table is a starting point, not advice. An accountant can model your own numbers in minutes, and the HMRC adjustment rules for switching mean it is cheaper to choose well at the start than to change. Whichever method you use, our bookkeeping guide for dropshippers shows how to build records that work for either, and our piece on what accounting software does that a spreadsheet cannot explains which tools handle the extra balances traditional accounting needs.
10. Common mistakes
- Following pre-2024 advice. The £150,000 entry limit and £300,000 exit limit described in older articles no longer decide anything, and cash basis is now the default.
- Forgetting that you must opt out to use traditional accounting. If you want it, the checkbox on the return has to be ticked every year.
- Mixing methods within a business. The choice is per business. HMRC says you can choose separately for each business you have.
- Treating a year-end stock purchase as a tax saving. Under cash basis it moves profit between years.
- Recording income by invoice date while on cash basis. Income counts when it is received.
- Ignoring the switch adjustments. Leaving cash basis with stock and money owed to you can create adjustment income, taxed over 6 years.
- Deciding without checking the tax year. Some HMRC pages and templates still describe the old rules.
Whichever method you choose, put money aside as you earn. Our guide on never getting a tax surprise again covers that, and our piece on how long to keep eBay seller records covers what to retain under either method.
Sources and how we checked
Facts in this guide were checked against these official pages in October 2026. Rules and figures change, so confirm anything that affects a decision. This is general information, not legal or tax advice.
- Cash basis: overview (GOV.UK)
- Cash basis: who can use it (GOV.UK)
- Cash basis: how to record income and expenses (GOV.UK)
- Cash basis before 6 April 2024 (GOV.UK)
- Agent Update issue 128 (HMRC)
- Cash basis: getting started (GOV.UK)
- BIM70005 Cash basis: overview, years to 5 April 2024 (HMRC Business Income Manual)
- Self-employment (full) notes, edition for the year to 5 April 2024 (HMRC)
- BIM72005 Cash basis: overview (HMRC Business Income Manual)
- BIM72010 Cash basis: exclusions (HMRC Business Income Manual)
- BIM72055 Leaving the cash basis (HMRC Business Income Manual)
- HS222 How to calculate your taxable profits, 2025 (HMRC)
- HS222 How to calculate your taxable profits, 2024 (HMRC)
- What records to keep (GOV.UK)
- Expenses: office, property and equipment (GOV.UK)
- Expenses: legal and financial costs (GOV.UK)
- Adjust your self-employment and property income (HMRC)
Questions people ask
Is cash basis the default for UK sole traders?
Yes for eligible sole traders and partnerships without corporate partners. GOV.UK says that from 6 April 2024 cash basis became the default method of accounting. To use traditional accounting you opt out on your Self Assessment return.
Was there a turnover limit for cash basis?
Before 6 April 2024 you could use it with turnover of £150,000 or less, and stay in up to £300,000. HMRC's Agent Update says the previous upper turnover limit was removed from the 2024 to 2025 return.
How is stock treated under cash basis?
You deduct what you pay for goods bought for resale, and the tax return notes say you need no opening or closing stock adjustments. Under traditional accounting you value stock at the end of the accounting period.
Can a limited company use cash basis?
No. GOV.UK lists limited companies and limited liability partnerships among those who cannot use cash basis. Companies work out profit under Corporation Tax rules, and the Income Tax cash basis is for sole traders and eligible partnerships.
What happens if I leave cash basis?
HMRC's helpsheet says you work out an overall adjustment. A negative amount is an expense. A positive amount is adjustment income, normally taxed over 6 years starting in the year you leave. Get advice first if you hold stock or are owed money.
Which method is simpler for Making Tax Digital?
Cash basis. HMRC says accounting adjustments such as prepayments and accruals apply only if you use traditional accounting, not the default cash basis, so there are fewer adjustments to make after the fourth quarterly update.