Paying with cash: all the rules and regs you need to know

Cash is an emotive issue for consumers and some small business owners who don’t want a cashless society. Many consumers value cash, especially during a cost-of-living crisis, as a budgeting tool to avoid getting into debt.

However, the rules for small businesses around accepting cash payments are complex, governed by rules around accounting for the transaction.

For small businesses, there are pros and cons. Cash means no transaction fees, but for speed of payment and secure transactions, card and digital payments can trump cash.

Below, you will find out what role cash has in the UK in 2024, the rules for paying with and/or receiving cash payments, tax and VAT rules for cash transactions, the pros and cons of cash payments for small business owners, and in what circumstances cash or digital payments are best for small businesses.

The role of cash payments in 2024

Back in 2015, trade body Payments UK predicted cash transactions would decline by 30% by 2024, from 18.1 billion in 2014 to 12.6 billion in 2024.

Cash use actually declined far faster, due to increased use of debit cards and one-off automated credits processed via the Faster Payments Service.

According to UK Finance, in 2022, the number of cash payments was barely half of the prediction from Payments UK, at 6.4 billion. But the interesting trend is that this marked a 7% increase from 2021, and at a time when some businesses opted to become cashless.

The UK Finance data found the proportion of people defined as living “largely cashless lives” and using notes or coins once a month or less had been rising for several years, reaching a peak of 23.1 million in 2021, but then fell to 21.6 million in 2022.

UK Finance tweaked its predictions on cash use in September 2023. It now expects that by 2032, there will be around 3.3 billion cash payments, amounting to 7% of all payments. This is higher than its previous forecast for 2031 of 3 billion cash payments, or 6% of all payments.

The reason for the rise in cash use is that, when consumers are struggling financially, like they have been in the last few years because of a cost-of-living crisis, higher energy bills, increased mortgage rates and rental costs, withdrawing cash and only spending that cash is an excellent budgeting strategy.

For small business owners considering the role of cash in 2024 and into the future, the data suggests that a significant minority of consumers will still use cash as their primary payment method for at least the rest of this decade, while most people will want to use cash sometimes – the UK isn’t close to becoming a cashless country just yet.

The rules of paying with cash and accepting cash payments

For businesses, the advantages and disadvantages of paying with or being paid in cash are different. Convenience, security, transaction fees, and the risk of fraud or petty theft are all factors for and against cash.

The bottom line is that businesses can refuse to accept cash as a payment method, just as they can refuse to accept cards.

This might seem unlikely, bearing in mind that cash is a form of ‘legal tender’, but the definition of legal tender is narrow. If a court decides someone owes a debt, the debtor can pay in any form of legal tender. However, for day-to-day transactions, the classification of legal tender does not apply, with the Bank of England stating that legal tender has ‘no place in everyday life’.

In 2022, in response to a petition to make it unlawful for shops not to accept cash, the government said it “does not plan to mandate cash acceptance. Businesses are able to choose the forms of payment they accept”.

Tax and VAT treatment of cash payments

VAT is due on qualifying goods and services that consumers buy from businesses, whether they are paid for using cash or another payment method.

HMRC operates a VAT cash accounting scheme for small businesses with an annual turnover below £1.35 million. Businesses can account for and pay VAT as if cash has actually been paid and received, even if payment was made using credit terms.

This scheme can benefit businesses’ cash flow. Usually, VAT is not due until a customer has paid, so if your business gives customers extended credit or suffers lots of bad debts, you could benefit. The benefit is limited if you are normally paid as soon as you make a sale or reclaim more VAT than you pay.

The tax treatment of cash payments is no different to other types of business revenue. You must declare cash income in your accounts and pay Corporation Tax as you would for any other type of income.

For self-employed sole traders, income received in cash should be reported via your self-assessment tax return, and will be taxed at your personal tax rate.

If businesses do not declare cash payments, this could be classed as tax evasion and HMRC could issue penalties.

The pros and cons of  accepting cash payments as a business

Explore the key benefits and drawbacks of taking cash:

Pros:

• Cash flow benefits – cash is immediately available for business requirements.
• No transaction fees – card issuers, banks, and other intermediaries aren’t involved in the transaction and so don’t take a cut of it. According to the British Retail Consortium’s 2023 payments survey, retailers spent £1.26 billion on card processing fees in 2022.
• Customer choice – consumers can choose whether to pay by cash or card at your business.
• Cash works – digital payment systems can crash, be hacked, or lose internet connections. Cash works even in a power cut when the till is down.

There are also many pros from a consumer point of view. For people on lower incomes, cash can be helpful in managing their money, and it is preferred by many older consumers who are used to operating in cash. People who are digitally excluded or have poor credit often prefer to use cash.

Cons:

• Potential theft – cash can be a temptation for some workers or burglars to steal.
• Slower operations – some business owners say their businesses run more quickly and efficiently when they operate as cashless because they don’t have to spend time counting, recording, and reconciling cash.
• No automated records – most card payments produce an automatic record of the transaction. Cash payments do not.
• Human error – cash necessitates some extra accounting work and can also make human errors more likely in record keeping.
• In-person banking – having to transport cash to the bank to pay in takes time, and also increases the risk it will be stolen from you on the street
• No online sales – online sales are increasingly important for most businesses, but cannot be made using cash.

The future of cash payments

Both the Bank of England and the British Retail Consortium have pledged to keep cash available as a payment option in the UK to encourage consumer choice and give businesses operational options.

This is despite a decline in cash use during the pandemic, and a corresponding rise in contactless payments.

In December, the Financial Conduct Authority (FCA) proposed new rules to maintain access to cash for UK consumers and businesses. Designated banks must ensure there is adequate access to cash through their branches and cash machines.

However, the overall trend is clear. Since 2019, nearly 15,000 cash machines have been taken away and more than 2,000 bank branches have closed. A third of adults are registered for at least one mobile payment service and 86% of adults use a form of remote banking, according to the Bank of England.

Although cash is valued by consumers and businesses, and the financial authorities will support cash, the trend of declining cash payments as a proportion of overall transactions is likely to continue.

The UK Finance data for 2022 found debit cards were used for 50% of all payments for the first time. Contactless card payments grew by 30%, to 17 billion, representing 38% of all payments. There were also many new payment options linked to smartphones, digital wallets, and other mobile payment methods.

Cash vs digital payments: what’s the best option for UK businesses?

Cash offers businesses three clear advantages over other payment options: liquidity, zero processing fees, and wider consumer choice.

Digital payment options are vital for most businesses, particularly those with an online presence. Their benefits include:

• They provide consumers with a streamlined experience
• Businesses receive payments in real-time
• Transactions usually process in seconds
• They often incorporate effective fraud detection measures

In terms of business operational efficiency, it takes longer to process cash transactions than to process digital payments.

Younger customers are more likely to use digital payment methods than cash, so digital payments can help capture new customers.

On the flip side, businesses accepting digital payments incur many recurring fees. Also, if technical errors occur, digital payment systems do not work until the errors are fixed.

When is cash better than a digital payment infrastructure?

Firstly, a business wants to make a sale, whatever the payment method – and there are instances when accepting cash is a better alternative than being paid digitally.

If most of your customers mainly use cash – this might include older customers, people who don’t have bank accounts due to poor credit, or people without internet access – offering cash as a payment option is appropriate.

In parts of the UK that don’t have reliable internet services, digital payments can be unreliable, whereas cash payments work every time.

As well as locations, certain trades are also more suited to cash payments. Low value, fast transactions, for instance, at a market fruit and veg stall, can often be conducted more efficiently using cash than a card machine.

From a small business perspective, receiving cash in hand can also aid cash flow because it enables you to immediately pay suppliers, or bank the cash. In comparison, digital payments can take a few hours to a week to enter your bank account, depending on the payment processor.

All that said, there are plenty of scenarios where accepting digital payments is more effective for a business than being paid by cash. Digital payments leave an automatic audit trail, and can easily be integrated into management accounts. Many businesses opted to go cashless during the pandemic following the instruction to avoid person-to-person contact, and the health risks of accepting physical cash as payment.

Having a digital payment infrastructure is a prerequisite for selling online. As online sales are growing in most sectors, most businesses require a digital payment infrastructure. If your business is online only and has no physical location to sell from, it doesn’t need a cash selling option.

All things considered, a combination of both forms of payment is the best option for most businesses.

Conclusion

There is still a desire and need to have cash as a payment option for most businesses. Consumers want choice and cash payments provide that. Cash helps consumers to manage their money, and accepting it provides businesses with cash flow benefits.

However, the trend towards other forms of payment has grown throughout the 21st century. This trend accelerates as technology creates more convenient, reliable, and secure payment methods. It is also affected by unusual events, such as the pandemic, which led to cash being used less frequently for a while.

Find out more about SMEs’ views on cash acceptance in this guide published by the FCA.

Benjamin Salisbury - business journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.