From April 2024, cash basis accounting, where income or costs are recorded at the date the money is either received or paid out, is the HMRC recognised default accounting method for self-employed businesses and partnerships with trading income.
Accruals method can be used but a box needs to be ticked on the tax return.
Cash basis is simple to understand – but can lead to anomalies and fluctuations in taxable profits. If a regular customer pays you towards the end of a month say £5,000, but at the year end of 31 March 2025, payment is not made until early April. That £5,000 income, on a cash basis, falls into the following accounting period to 31 March 2026, whereas it would be a debtor on the accruals basis and fall into the year to 31 March 2025. Repeat this with a few other customers and the figures can be substantial. Fluctuating levels of income can lead to fluctuating tax bills too.
From a business management point of view, only accounting on a cash basis does not give you an accurate view of your business performance. Just because there is cash in the bank at any given time does not necessarily mean the business is making a profit!
The Low Income Tax Reforms Group has a comprehensive guide to the cash basis – read it here.
Please contact us if you have any questions or require advice on this subject.
