Small businesses might find that cash basis accounting is a more straightforward way to manage their finances than traditional accounting.
Sole traders and partnerships can use cash basis accounting, which is particularly suited to businesses that don’t have a complicated setup.
Deciding whether to use traditional accounting or cash basis needn’t be tricky – find out what you need to know here.
Cash basis accounting is relatively new – HMRC introduced it in 2013-14. The system lets you do your taxes based on when money actually comes in (and leaves) your business.
This is different to traditional (accruals) accounting, which is based on when you do the work and raise the invoice, rather than when you receive the cash.
Here’s a cash basis accounting example for income...:
...and a cash basis accounting example for expenses:
There are rules about who can and can’t use cash basis accounting. You have to:
If you have more than one business, you have to use cash basis accounting for all of them – and you can’t earn more than a combined turnover of £150,000.
And what if your business is doing well and makes more money throughout the year? You can stay in the scheme up to a turnover of £300,000 a year – after which you’ll need to use traditional accounting for your next tax return.
Limited companies and limited liability partnerships can’t use cash basis accounting, and HMRC has a list of other types of businesses that can’t join (these are niche, though, including waste disposal and ministers of religion).
Cash basis is simpler than traditional accounting, because you don’t need to keep other records on top of your income and expenses.
On top of the usual tax records you need to keep, when using traditional accounting on your tax return you need to show:
But gov.uk calls out a number of reasons why cash basis accounting might not suit your business, for example if you:
This means that cash basis accounting is ideal for simpler, smaller businesses that aren’t owed a lot of money (and don’t owe a lot of money).
Ultimately deciding between traditional accounting or cash basis depends on your setup, so it’s best to speak to a professional accountant or legal adviser if you’re not sure.
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
22 June 2020 • 9-minute read
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