Are you self-employed? Do you know about cash-based accounting?

Changing to cash-based accounting might not suit your business for several reasons. Accruals, also known as 'matching ‘, allow you to offset expenses and related income in different tax years. 

 

Depending on your type of business, cash-based accounting could mean you move between tax bands each year. This can happen if, for example, income made on credit is understated in one year. When money is paid in the following tax year your profits could rise above the next threshold. Very varied tax bills from year to year can make your budgeting and cashflow hard to manage. 

 

The government says cash-based accounting is simpler. You don’t have to work out and post complex adjustments for accruals, pre-payments, stock, and capital allowances, for example. You can prepare your accounts more simply using your bank statements. It makes records easier to manage for Making Tax Digital (MTD) for Income Tax Self-Assessment (MTD for ITSA). 

 

Dealing with stock is simpler because it’s accounted for at cost when bought. As a business owner you can make drawings of stock for your own use at cost rather than market value. That’s all easier to work out and record for auditing but is less helpful for understanding actual business performance. 

 

Previously only businesses with total receipts below £150,000 could file tax returns based on cash. However, there was a cap of £500 on interest deductions and you could only carry forward loss-relief against future profits. These restrictions no longer apply for the 2024/25 tax year so larger businesses have opportunities for tax planning. 

 

Alternatively, if you’re a sole trader or partner close to an income tax threshold you could defer some invoices or supplier payments. With cash-based accounting the delayed income or expenses would then appear in your 2025/26 return, for example. As long as your income and expenses return to your normal levels you could stay in the same tax band each year. 

 

If your business has enough warehouse space you could arrange stock purchases or pay suppliers early to avoid the personal tax allowance taper. 

 

Cash-basis accounting could also allow you to make the best use of your capital allowances. 

 

Managing your taxes is only one concern for your business. Maintaining customer and supplier relationships is important too. 

 

The best choice of you will depend on a lot of things so we’re happy to discuss your options with you. This year is especially complicated because of basis period reform as well.