Cash basis change means choice for unincorporated businesses

Rules extending use of the cash basis to calculate trading profits need consideration now.

At present, accounts for the self-employed and partnerships are taxed on the accruals basis, unless the business elects to use the cash basis, instead. In a move aimed at simplification, Autumn Statement 2023 reverses this position. From 6 April 2024, the cash basis becomes the default, unless a business opts out. Businesses currently excluded from the cash basis, such as limited liability partnerships and those who have made a claim for farmers’ or artists’ averaging, however, continue outside the scope.

Cash basis rules are changed, so that:

• businesses of any size will be able to use cash basis: existing turnover restrictions will be dropped
• current restrictions on how much interest can be deducted from profits are removed (where such interest is incurred wholly and exclusively for the purposes of the trade)
• current loss relief restrictions are removed, so that cash basis losses can be used in the same way as accruals basis losses.

The change matters

It’s not just jargon: moving to the cash basis can make a significant difference to cash flow, and the timing of tax liabilities, especially initially. It won’t benefit every business. Opting out of cash basis and staying with the accruals basis may be more appropriate for you, so there is a choice to be made.

In outline, if your business operates with customers paying at point of sale, and you have trade credit on the amounts you owe, moving to the cash basis is likely to accelerate the timing of your income tax and National Insurance payments. This can be the case in the retail sector, for example. If on the other hand, you give significant credit to your customers, so that amounts owing to you are usually more than the amounts you owe, moving to the cash basis is likely to have a positive effect on your cash flow. Generally, the more complex the business, the more the accruals basis is important in providing financial information and control. We will be pleased to consider the position with you individually.

Note that there are separate rules around property income cash basis, and these are not impacted by the changes described here.