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Cash basis to become default for Self-Employed and Partnerships

  • 14th December 2023

In a major shift, the cash basis will replace the accruals basis as the default method for calculating trading profit for the self-employed and most partnerships from 2024/25.

The accruals basis is currently the default, with a business having to opt in to use the cash basis. In future, a business will need to opt out of the cash basis if it wants to use the accruals basis.

Restrictions removed

A business, regardless of size, will be able to use the cash basis once the £150,000 turnover restriction has been removed. The removal of two other restrictions will mean there are no longer any obstacles to – otherwise qualifying – businesses choosing to use the cash basis:

  • Interest costs will in future be fully deductible. Currently, there is a maximum deduction of £500.
  • Losses incurred under the cash basis will be relievable in the same way as accruals basis losses. Currently, a cash basis loss cannot be relieved against other income or carried back.

When moving from the accruals basis to the cash basis, several adjustments may be necessary to avoid double counting or items being omitted.

Pros and cons

The cash basis removes complexities such as accruals and most capital allowances, though it will be unsuitable for some businesses, especially larger ones.

  • The cash basis does mean it is quite easy to calculate trading profit by, for example, extracting information from easily accessible documents, such as bank statements – so there may be less need for a bookkeeper.
  • It is also easier to legally manipulate a period’s trading profit. For example, paying suppliers early towards the end of a period will reduce profit.

The accruals basis, however, is a more accurate reflection of a period’s trading profit, so banks and other financial institutions may insist on this basis being used.

HMRC’s guide to calculating trading profits, notably section 3 on moving to the cash basis, can be found here.

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