‘Cash basis’ is a way to work out your income and expenses for your Self Assessment tax return, if you’re a sole trader or partner. On the 6th of April 2024, cash basis became the default method of accounting, meaning you’ll need to opt out if you wish to use traditional accounting or cannot use cash basis accounting.
Your Guide To Cash Basis Accounting
Previously, only unincorporated businesses with total receipts below £150,000 were entitled to opt out of accruals and file their accounts with HMRC using the cash basis. That restriction has been lifted, and cash basis accounting is available to unincorporated businesses of any size.
- What Is The Difference Between Cash Basis and Accrual Accounting?
- What Are The Benefits Of Cash Basis Accounting?
- Should I Switch To Cash Basis Accounting?
What Is The Difference Between Cash Basis and Accrual Accounting?
Under cash basis, transactions are recorded only when cash is received or paid out. That means revenue is recorded at the time of cash receipt, and expenses are recorded when they are paid. It’s a straightforward accounting method that was developed for small business owners with predominantly simple transactions.
On the other hand, accruals accounting recognises transactions when they are incurred or earned, regardless of when the cash is received or paid. While it does require slightly more complex bookkeeping, accrual accounting generally provides a more accurate picture of a business’s financial position.
What Are The Benefits Of Cash Basis Accounting?
Many businesses will benefit from the simplicity of filing accounts under the cash basis as this will remove the need to calculate and post accruals adjustments. This could reduce the quarterly reporting burden when making tax digital for income tax is mandated.
Switching to the cash basis may also present tax planning opportunities for some businesses. For example, businesses may be able to tweak the timing of certain receipts or payments to keep taxable profits within a particular tax band each year.
Should I Switch To Cash Basis Accounting?
For now, the accrual basis remains the most appropriate accounting method for most businesses, but this depends on your business’ circumstances. Cash basis is likely to be unsuitable if you:
- Want to claim interest or bank charges of more than £500 as an expense.
- Run a business that’s more complex; for example, you have high levels of stock.
- Need to get finance for your business – a bank could ask to see accounts drawn up using traditional accounting to see what you owe and are due before agreeing a loan.
- Have losses that you want to offset against other taxable income (‘sideways loss relief’).
What Should My Business Do Now?
If you’re self-employed or a partner in a partnership, you’ll need to choose between cash basis or accruals accounting. For support in making this decision, speak to one of our expert accountants. They’ll advise you on the best choice for your business’s circumstances and walk you through opting out if accruals accounting is deemed preferential. Get in touch with Digital Tax Matters today, and handle your taxes with confidence.