What do we do currently?

All businesses with turnover over £150,000 must prepare accounts with debtors, creditors, stock and assets. This is known as traditional accounting.

Businesses with turnover under £150,000 have the option of using cash accounting.  This means that debtors, creditors, stock and assets are not used to calculate their annual profits.  Profits are based on the cash movements during the year.

For accounting years forming the basis period for the 2024/25 tax year onwards, all sole traders and partnerships are being converted to cash accounting from the traditional basis by HMRC.  Businesses can decide to opt out and some businesses are deemed ineligible for cash accounting. 

The changes are designed to support the implementation of Marking Tax Digital, which is currently scheduled to commence in April 2026.

What is cash accounting?

Cash accounting means that you prepare your accounts on cash movements, and not on the date that the invoice was raised.

For example, I raise an invoice of £1,000 to prepare Jack’s accounts on 1 March 2025, which Jack pays on 28 March 2025. Both Jack and I have 31 March accounting year ends.  The accounts invoice is included as a sale under cash accounting for me and an expense for Jack, as it is paid prior to 31 March 2025.

However, if Jack paid our fees on 11 April 2025, under cash accounting, the sale would not be included in my 31 March 2025 accounts and the expense would not be included in Jack’s accounts either.

If the accounts were prepared under traditional accounts rules the sale debtors would be included in my accounts and a trade creditor in Jack’s accounts.

So, who stands to benefit the most from these changes?

The businesses that stand to benefit the most are sole traders or partnership service businesses. If they invoice monthly in arrears their debtors, stock or work in progress are excluded from the calculation.

Who should opt out?

You have the right to opt out of cash accounting and use traditional method of accounting when preparing your tax return (however, you must not switch methods continually).

Traditional accounts would be beneficial for the following businesses:

• Businesses that have high levels of stock, or seasonal businesses that have high levels of expenditure just prior to their year-end.
  
• Finance:  If you have a loan or mortgage or expect to need a loan or mortgage, the bank or lender may require your accounts to be prepared under the traditional accounting method due to the signed agreement with the bank and to assist you to obtain future finance.

Who is ineligible to use cash accounting

There are a few businesses which are ineligible to use cash accounting. This includes all limited companies and Limited Liability Partnerships (LLPs).

You also cannot use the cash basis if you are one of the following:

• Businesses that wish to average their profits (eg farmers, authors, artists).
  
• Farming businesses with a herd election basis.
  
• Businesses who have claimed research & development costs tax relief.
  
• Waste disposal businesses.
  
• Lloyds’ underwriters or dealers in securities.
  
• Ministers of religion.
  
• Lease premises
  
• Property renovation businesses.

What next?

If you are considering moving to the cash basis from the traditional method, it is important to liaise with your accountant to ensure that this is the right decision for the future of your business and your personal circumstances over the next few years. If you would like our assistance, please contact us .