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Expanding cash basis as the default

The current default accounting method for businesses in the UK is accruals basis accounting, which involves noting transactions as they happen instead of upon payment of invoices. If a qualifying business wanted to use cash basis accounting to record transactions when payments are completed, they would have to opt in.

However, following the Autumn Statement in November 2023, the government will make cash basis accounting the default instead. This means cash basis will be the standard method of calculating trading profit for self-employed traders and partners with trading income, taking effect from the start of the 2024–2025
tax year.

Businesses will now have to use the cash basis scheme and opt out if they want to use the accruals basis scheme instead. This should make it simpler for most businesses to complete tax returns reporting their income to HMRC.

Removal of cash basis restrictions

Previously, small businesses could only use cash basis accounting if their annual turnover was below a certain limit. Now, regardless of size, any business can use the cash basis scheme after the removal of the £150,000
turnover restriction.

Another two restrictions will also be removed, meaning there are no more obstacles to businesses that would otherwise qualify using the cash basis scheme:

  • Interest costs will be fully deductible (no £500 maximum deduction).
  • Cash basis
    losses can now be relieved like accruals basis losses.

When a business moves from accruals to cash basis, some adjustments will be necessary to make sure no items are omitted or double-counted.

Pros and cons of cash basis accounting

The cash basis scheme simplifies accruals and capital allowances, so calculating trading profit is typically easier. That said, it may not be suitable for larger businesses.

It also offers the opportunity to legally manipulate trading profit for a period, for example, by paying suppliers early closer to the end of the period to reduce profit.

However, banks and financial institutions may insist on using accruals basis accounting, as it will reflect a period’s trading profit more accurately.

Switching between accruals basis and cash basis

Information on moving to cash basis is available in the HMRC guide to calculating trading profits, and more details on the cash basis expansion can be found in the government’s policy paper.

If your business is affected by this change and you need to switch to cash basis accounting in 2024, it can help to get professional assistance from qualified accountants.

At gbac, we have a team of accountants in Barnsley who can assist with a variety of financial services, ensuring your bookkeeping and tax management are in order.

Call us on 01226 298 298 to discuss your accounting needs, or send an email to info@gbac.co.uk and we will get back to you soon.