What is Cash Basis Accounting?
Cash basis accounting is a simplified method of recording business income and expenses. Under this system, you only record income when it’s received and expenses when they’re paid, unlike traditional accounting which records transactions when they’re incurred.
Key Changes to Cash Basis from 6 April 2024
Starting from the 2024 to 2025 tax year, several significant changes to cash basis accounting will come into effect:
- Removal of Turnover Thresholds: The previous limits of £150,000 and £300,000 turnover for using cash basis have been eliminated, making it available to more businesses.
- No Cap on Interest Deductions: The £500 cap on interest deductions has been lifted, allowing for higher interest expense claims.
- Fewer Restrictions on Loss Offsets: The restriction on offsetting losses against other taxable income has been removed, offering more flexibility in tax management.
- Choice for Multiple Businesses: If you run more than one business, you can now choose between cash basis or traditional accounting for each one separately.
Who Can’t Use Cash Basis?
While cash basis accounting is available to most sole traders and partners, certain businesses are ineligible, including:
- Limited companies and limited liability partnerships
- Lloyd’s underwriters
- Farming businesses with a current herd basis election
- Businesses claiming specific allowances such as business premises renovation, research and development, and more
- Dealers in securities and certain other specialized businesses
Getting Started with Cash Basis
To adopt cash basis accounting, maintain records of all your business income and expenses. Calculate your taxable profit based on these records at the end of the tax year and indicate on your tax return that you’re using cash basis.
Recording Income and Expenses
Record income only when received and expenses when paid. For example, an invoice issued on 15 March 2023 and paid on 30 April 2023 should be recorded in the 2023 to 2024 tax year.
Allowable Expenses
Under cash basis, allowable expenses include:
- Day-to-day running costs
- Administrative expenses
- Training costs
- Equipment and machinery costs
- Interest and charges
- Cost of goods for resale
- Simplified expenses for vehicle costs, working from home, and living on business premises
Transitioning from Traditional Accounting
If switching from traditional accounting to cash basis, follow HMRC guidelines for transitional arrangements. Maintain thorough records and keep them safe, even though they aren’t submitted with your tax return.
Making the Switch
Cash basis accounting simplifies financial management for sole traders and partners. From 6 April 2024, start using this method if it suits your business. For personalized advice, consult a qualified accountant or tax professional.
