Cash basis accounting - what’s the latest?

Autumn Statement

One of the significant changes announced in the Autumn Statement concerns cash basis accounting. For 2024/25 onwards it will be the standard for sole traders and business partners. It’s already used by some businesses, but is subject to limitations and requires you to opt in. From April 2024 the opposite will be true; you’ll have to opt out, and most of the limitations will cease to apply.

Businesses which are currently not entitled to opt in to the cash basis, e.g. waste disposal operators and businesses run through a limited liability partnership, will continue to be excluded.

Switching to the cash basis doesn’t necessarily affect how you keep your accounting records but only how you use them to calculate your profit for tax purposes.

Cash accounting in practice

Ultimately, taxable profits under the cash basis will equal exactly those calculated using the accruals basis. However, it will to a degree change the year for which they are taxable. This might be advantageous for some years and disadvantageous for others. We expect most businesses will want to continue keeping their records on an accruals basis, i.e. recording expenses when they are incurred, not when they are paid, and income (turnover) when it’s earned, not when it’s received. This provides a more accurate picture of how your business is performing and allows you to keep track of who you owe money to and who owes you. Something else to keep in mind is that organisations other than HMRC, e.g. banks and lenders, are likely to want to see your accounts using the accruals basis.

Cash basis changes

Changes to the cash basis of accounting will largely align it with the tax rules for the accruals basis. The changes that will apply from 6 April 2024 are:

• it will no longer be subject to a turnover limit (turnover of £150,000 or less to join and less than £300,000 to stay in it)
• it becomes mandatory for all unincorporated businesses. However, a business can elect to report its profits on the accruals basis
• the restriction of tax relief for interest paid on general borrowing for the business to £500 per annum is scrapped
• the restriction on relief for trading losses against other income is also scrapped. This means, e.g. loss relief can be claimed against other income of the business owners.

An advantage to using the cash basis is that tax relief for unpaid invoices is automatic and immediate instead of having to claim it as a separate deduction only after the invoices have become bad debts.

Accounting adjustments

There’s no reason to change your accounting routines if you decide not to opt out of cash accounting. However, where the cash basis is used you will need to make adjustments to the figures of profit and loss produced by your bookkeeping records. Essentially, you’ll need to remove debtors, creditors and accrual of income and expenditure to arrive at the figures for your tax returns.