Cash Basis Accounting for Unincorporated Businesses

Starting from the 2024/25 tax year, unincorporated businesses will be required to use the cash basis method for preparing their accounts and calculating taxable profits. This is a significant change from the previous years, where the accruals basis was the default, and traders could opt for the cash basis if they were eligible. The restrictions that previously applied to the cash basis have been removed to facilitate this transition. 

The cash basis is a simpler method of accounting that focuses on cash inflows and outflows. Income is recognised when it is received, and expenses are accounted for when they are paid. This approach eliminates the need to deal with debtors, creditors, prepayments, and accruals. Additionally, bad debt relief is automatic on a cash basis, as income is only recognised upon receipt.

In contrast, the accruals basis matches income and expenditure to the relevant accounting period, requiring the calculation of debtors, creditors, prepayments, and accruals.

To make the cash basis the default method, several restrictions that were applied in previous years have been lifted. The turnover limits of £150,000 for electing to use the cash basis and £300,000 for mandatory transition to the accruals basis have been removed from 2024/25. The £500 annual cap on deductible interest and finance costs has also been eliminated, allowing traders to deduct all allowable interest and finance costs.

Furthermore, the restrictions on loss relief on a cash basis have been removed. From 2024/25, traders using the cash basis will be able to relieve losses sideways against income of the current and previous tax year, as well as carry back losses against income of the previous three years in the early years of the business.

Traders who prefer to continue using the accruals basis will need to make an election to do so, as the cash basis will be the default method from 2024/25.

When transitioning between the cash basis and the accruals basis, adjustments may be necessary to prevent double-counting or omission of income and expenditure. Adjustments may also be required when capital allowances have been claimed on an accrual basis, but the expenditure still needs to be fully relieved to ensure that the balance of the expenditure is accounted for.

The shift to the cash basis as the default method for unincorporated businesses is expected to simplify accounting processes for many traders. By eliminating the need to deal with complex accruals and focusing on cash inflows and outflows, businesses can streamline their financial reporting and reduce administrative burdens.

However, traders must understand the implications of this change and assess whether the cash basis is suitable for their specific circumstances. Some businesses, particularly those with significant debtors, creditors, or complex financial arrangements, may still benefit from using the accruals basis.

Traders should seek professional advice from their accountants or tax advisors to determine the most appropriate accounting method for their business. They should also ensure that they make the necessary adjustments when transitioning between the cash basis and the accruals basis to avoid any discrepancies in their financial reporting.

As the new default accounting method, the cash basis is expected to provide a more straightforward approach to financial reporting for many unincorporated businesses. The removal of previous restrictions and the automatic relief for bad debts will likely be welcomed by traders who have struggled with the complexities of the accruals basis.

However, businesses must carefully consider their individual circumstances and seek expert guidance to ensure that they make informed decisions about their accounting practices. By understanding the implications of the cash basis and making any necessary adjustments, traders can ensure that their financial reporting remains accurate and compliant with tax regulations.
The transition to the cash basis as the default accounting method for unincorporated businesses in the 2024/25 tax year marks a significant shift in financial reporting practices. While this change aims to simplify accounting processes for many traders, businesses must assess their specific needs and seek professional advice to navigate this transition effectively.