If you are self-employed or a partner within a business, the latest government changes will significantly impact your method of reporting tax. From April 2024, a cash basis will replace accruals as part of the move to simplify the calculations of taxable profits for Making Tax Digital. This means that, by default, all self-employed taxpayers and partnerships will report their earnings under the cash accounting basis.
Prepare Your Business For Simpler Accounting
Making Tax Digital is now in full swing, and most businesses are learning to adapt to their new accounting methods. The most recent switch to the cash basis method is designed to streamline the process further. Learn more about what this means for your business below:
What Is Accruals?
Accruals relate to money that has been spent or earned by the business but has yet to be paid (either by the business or the customer). It is a method of accounting that involves recording revenues and expenses as they are incurred. For example, suppose a company has sold an item but has yet to receive the payment from the customer. In that case, the revenue made from the purchase will be recorded on the company financial statement as an accrual.
What Is The Cash Basis?
As opposed to reporting revenue before payment, the cash basis method only records expenses that have been paid or obtained. An example of this is a construction company that only receives payment once the project is complete. On their cash basis accounting, they would only recognise the revenue from the project once it is closed off and their client has paid.
How Will The Update Impact Businesses?
Accruals are currently the default method for businesses to calculate their taxable profit. In the past, most companies with total receipts under £150,000 were eligible to elect to use the cash basis. However, the new measures will now reverse this presumption.
From April 2024, the cash basis will become the default position for all self-employed taxpayers and partners, and then they will have the option to elect for the accruals basis.
As most businesses currently use the accruals basis, this fundamental change can potentially create very different profits. While the default cash basis, in theory, should make it simpler to calculate taxable profits, the transition from accruals may be complicated.
Contact Us For Help With Your Accounting
If you need help switching to the cash basis or would like to opt out of the change from the get-go, please do not hesitate to contact our team. We would be more than happy to arrange an appointment to discuss your requirements and determine which route would suit your business best.