There are some myths in accounting that just won’t be debunked. Top of our list of ‘unbunkables” is the myth that states you cannot pay for business expenses in cash.
Let’s be clear: you can definitely spend your cash on business expenses. If it’s a qualifying expense, you can get a tax deduction for it.
Do people still use cash?
Absolutely. Some small businesses receive a lot of cash, and actively encourage you to pay with cash too. These are usually businesses or sole traders with high-frequency, low-value transactions such as hand car washes, market stall holders, hairdressers and barbers, street performers, and similar trades.
There is also the issue of cardless POS payment system that run online. Without a decent mobile phone signal, card details cannot be verified, and transactions won’t go through. This can really affect taxi drivers in remote areas, for example, and payments for goods at outdoor events in non-urban settings like crafts fairs, and car boot sales (more on these later).
There are also businesses that want to avoid paying fees associated with card processing when possible, even if they are not completely “cash only”. Cash is also instantly accessible, and not taking card payments eliminates the risk of unexpected chargebacks and potential chargeback fraud.
UK cash use in decline
Despite there being numerous ways to pay these days, many people still use cash out of choice too, but it is on the decline. A government report stated that:
“Cash was used for 51% of all payments in 2013, but by 2023 this had fallen to 12%.”
However, this still means that cash payments accounted for 4.4billion payments in 2024. That’s a lot of cash.
One report predicted that cash usage would continue to fall to just 4% of all payments by 2034, but that still outstrips cheques by miles, which now only account for 0.2% of transactions.
Cash costs your business money
If you run a business bank account, it actually costs you money to put any cash you’ve been paid in your bank. That’s if you have a branch near you, of course, or don’t mind standing in a post office queue to pay it in. It’s actually more economic to pass the cash on to someone else to pay for small business expenses.
The challenges of cash
Generally, those using cash for expenses face challenges because:
- They are a key area where business owners fall down on their record keeping.
- You can’t always get an ‘official’ receipt.
- It’s difficult to ‘balance’ cash in the books.
As a result, cash expenses are often an area that HM Revenue & Customs challenge in an investigation.
No cash in sight
We find that in many book-keeping records, it looks on paper that there was no cash in the business to pay for a submitted list of cash expenses.
Often, this is because the business owner put their hand in their pocket and paid for it personally with their own cash. However, that transaction has not been noted in the records (or accounting software). This problem can be compounded if you won’t get a receipt for your purchase.
All these situations will prompt questions and/or require adjustments.
Selling second hand goods
Car boots, charity jumble and garage sales
Every weekend, millions of us flock to muddy fields or windswept car parks to enjoy a good rummage at a car boot sale. If you sell second-hand goods, and buy from a car boot sale, or source used items there to create new products for your business or side hustle, you usually won’t be able to get a receipt for these.
If you bought at a car boot or informal sale, you could compile (for example):
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- A detailed list of products bought (with images if you are really keen)
- Prices paid
- Dates of the car boot sales and proof of attendance (if possible!)
Jumble and informal garage sales
The same applies to informal sales such as school jumble sales and your neighbour selling the contents of their loft on their front lawn. Charity shops are different: you’ll get a receipt.
If you buy in person and cannot get a receipt, you should keep the best records you can to prove in any investigation that these were business expenses eligible for a tax deduction.
Online
A lot of us go online to find a bargain or a specialist item. So, for example if you are buying on Facebook marketplace, or from a “local items for sale” group like Gumtree, you often collect an item and pay the seller in cash. To ‘prove’ your purchase, take screenshots of evidence such as:
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- The original listing.
- The conversation showing what you bought and how much.
- Listing images of what you bought.
File them in your accounting software (if you can). The more evidence you can retain, the better.
Cash may not be king but it’s still an ace you can play
Next time a customer offers to pay you in cash, remember:
- You can buy goods in cash for your business. In fact, it’s often a good idea to save on bank charges, or a time-consuming trip to the bank.
- Keeping good records detailing your expenses is key. Consider some receipt capture/app technology for your phone to help you do this.
- Do your book-keeping in small manageable chunks to make life easier.
- Aim to have some sort of receipt for every purchase as best practice, and where you can’t get one, retain as much detail as possible.
Confused by cash accounting?
Ask your accountant for advice and assistance. If you don’t have an accountant, or not happy with your current one, we’d love a chat about how we can help.
Looking for accounting software to make life easier? Grab a discount Xero licence right here:
About the author:
Dan Heelan is the Business Services Director of Heelan Associates, an accounting firm that helps small business owners across the UK start, survive, and grow.
With a background as a small business owner himself, he discovered his passion for accounting and tax early in his journey and now focuses on empowering fellow entrepreneurs with the knowledge and tools to navigate the financial side of running a business.
You can see and hear Dan in action in his regular: