There are important changes to the rules on cash basis accounting, aimed at driving many more businesses into using the scheme. As a result, most unincorporated businesses will need to decide what to do next.
We look at the factors involved, and what moving to the cash basis might mean for you. Our publication gives the background to this change by HMRC, what your choices are and what difference it could make.
In outline
The change from 6 April 2024 makes cash basis the default method of calculating profits for trading income for Income Tax, rather than the traditional accruals basis. The move turns the previous position upside down. Businesses now have to opt out of cash basis, whereas previously, they had to opt in.
In a second major move, the cash basis regime itself has been given a considerable makeover. Key restrictions under the old regime have been lifted, making cash basis more viable for a wider range of businesses.
For the avoidance of confusion: the cash basis rules used by landlords, and the cash accounting scheme for VAT are separate regimes, and there are no changes to either of these.
Your choices
Essentially, your business will now need to use the cash basis, unless you opt out. Note that companies cannot use cash basis, and some businesses are excluded. Some of the main exclusions are:
> partnerships which have a corporate member
> limited liability partnerships
> Lloyd’s underwriters
> those using the special profit averaging rules for farmers, and creators of literary or artistic works
> farming businesses with a current herd basis election
> businesses that have claimed business premises renovation allowance
> ministers of religion
> businesses that have claimed research and development allowances.
Apart from these groups, all other unincorporated businesses should use cash basis from the 2024/25 tax year, unless they opt out.
Opting out requires a formal election, which is made on the tax return. The election has an effect from the tax year in which it’s made, and doesn’t need to be made again. You can, however, revoke the election, and move back onto the cash basis, if you choose.
What difference does it make?
The basis on which accounts are taxed matters for two key reasons –
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- It impacts the information available to help you control and run the business.
- It can impact cash flow and the timing of your tax liabilities.
We look at these in more detail in our latest Topical Issue: Using cash basis accounting publication.
Contact
If you would like to discuss your situation with our experts, please call our Leicester office on 0116 254 9262, or Loughborough office on 01509 263500. Alternatively, our contact form is here