From 6 April 2024 the cash basis has replaced accruals as the default method for preparing sole trader and partnership accounts for tax purposes.
Switching to the cash basis may present tax planning opportunities
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 now been lifted so that the cash basis is available to unincorporated businesses of any size and they now need to opt out of the cash basis if they want to continue filing using accruals.
The accruals basis will remain the most appropriate method for most businesses. Those choosing to continue to file their accounts in this way need to opt out of the cash basis for 2024-25 and this preference will be automatically carried forwards for future years.
Some businesses may 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 tweaking the timing of certain receipts or payments to keep taxable profits within a particular tax band each year. The potential tax benefits of these should be balanced against other business needs.
Where a business that was reporting under the accruals basis does not opt out of the cash basis, adjustments will be required for the tax year 2024-25 to ensure income and expenses are not double counted.
We can help you decide whether switching to the cash basis or sticking with accruals is the best option for your business.