BIM72020 - Cash Basis: receipts: capital receipts under or after leaving the cash basis
Source: gov.uk (2025-04-07)


S96A ITTOIA 2005, S96B ITTOIA 2005, S105 (2A) ITTOIA 2005

Ordinarily, capital receipts are not taxable in calculating the profits of a trade (see BIM35001 (https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim35001) onwards for further information on the capital / revenue divide). However, for a business using the cash basis or which has previously used the cash basis, special rules mean that certain capital receipts are included in the calculation of trading income for the tax year.

Amounts to be included as cash basis receipts of the trade are different depending on whether they are received whilst the business is using the cash basis or after they have left the cash basis:
- Receipts from the disposal or deemed disposal of items of a capital nature under the cash basis.
- Any proceeds or capital refunds received in respect of an asset whilst the business is using the cash basis should be brought into account as a receipt of the trade where the whole or part of any expenditure paid to acquire, create or improve the asset has been:
- brought into account in calculating the profits of a trade under the cash basis, or
- is cash basis deductible (see BIM72035) but was incurred (or treated as incurred) before the tax year in which the cash basis was entered into and was brought into account in a year for which the cash basis did not apply; this includes.
- a capital allowance made under Parts 2, 5, 6, 7 or 8 of CAA2001 or where qualifying expenditure (within the meaning of Parts 2, 7 or 8 of CAA 2001) is allocated to a pool for the trade and is set-off against different disposal receipts.
- Receipts from the disposal or deemed disposal of items of a capital nature after leaving the cash basis.
- Any proceeds in respect of an asset where the expenditure would be qualifying expenditure under Parts 2, 5, 6, 7 or 8 of CAA 2001 should be brought into account as disposal proceeds under these parts of CAA 2001 rather than as a receipt of the trade.
- Any other proceeds or capital refunds received in respect of an asset where the whole or part of any expenditure paid to acquire, create or improve that asset was brought into account in calculating the profits of the trade whilst the business was using the cash basis, or, in a year before the business last used the cash basis and for which the cash basis did not apply, should be brought into account as a receipt of the trade.
In all cases proceeds include
- any proceeds arising from the disposal of the asset or any part of it.
- any proceeds arising from the grant of any right in respect of, or any interest in, the asset.
- any amount of damages, proceeds of insurance or other compensation received in respect of the asset.
Any of the above receipts should be proportionately reduced if only part of the expenditure was or would have been brought into account in calculating the profits of the trade under the cash basis.

In addition, a person must bring into account a cash basis receipt equal to
- The market value of the asset when the person ceases to use it for the purposes of the trade.
- The relevant proportion of the market value of the asset if at any time there is a material increase in the person’s non-business use of the asset (see example below) - S96A(5) - (6) ITTOIA 2005
Example

Hugo buys a van for use in his trade on 6 April 2024. The van costs £5,000, which he pays in cash, and the business use proportion is 90%.

When calculating his profit for the tax year ending on 5 April 2025 - his cash basis expenses will include £4,500 (£5,000 x 90%) for the purchase of the van.

Hugo’s wife starts using the van for weekly supermarket trips from 6 April 2025. Hugo works out that the business use proportion has decreased to 70%. At that time, the market value of the van is £4,000. The amount to be taken into account as a cash basis receipt for the year to 5 April 2026 is the ‘relevant proportion’ of the market value of the van at the time the business use decreased.

The relevant proportion is the difference between the private use before and after the increase, so 30% less 10%.

The cash basis receipt is £800 - 20% of £4000.

There is no corresponding cash basis expense if the level of business use subsequently increases.

Industrial development grants

Where a person carrying on a trade receives a grant under:
- S7 or S8 of the Industrial Development Act 1982, or
- Article 7, 9 or 30 of the Industrial Development (Northern Ireland) Order 1982,
the payment must be brought into account as a receipt in calculating the taxable profits of the trade.

For a person to whom cash basis applies , this is the case even if the grant is designated as made towards the cost of specified capital expenditure.