If you’re running a small business in the UK, there’s a big change coming your way that could make your life a lot easier. From April 2024, the way you calculate your profits for tax purposes is changing.

What’s changing?

Up until now, most businesses have had to calculate their profits using the ‘accruals basis‘. This method is a bit complicated and involves recording income and expenses when they’re incurred, not when the money actually changes hands. However, starting in April 2024, the default method will be the ‘cash basis‘.

What’s the cash basis?

It’s what it sounds like. You only count money when it actually comes in or goes out of your business. I sold something but have yet to be paid. It only counts as income once the money’s in your account. I bought supplies but still need to pay the bill. It’s an expense once you’ve handed over the cash.

Why is this good news?

1. It’s simpler: There is no need to worry about complicated accounting concepts like accruals and prepayments.
2. Bad debts are automatically dealt with: If someone doesn’t pay you, you won’t be taxed on that money.
3. Immediate relief for expenses: You get tax relief as soon as you pay for something, not when you use it up.

What about bigger purchases?

In most cases, you can deduct the full cost of equipment when you buy it. There are some exceptions, like cars, but generally, it’s much simpler than the old system of capital allowances.

Any catches?

Not really! The government has removed most of the restrictions that used to apply to the cash basis. There’s no turnover limit anymore; you can claim as much interest on loans as you like, and you have more options for dealing with losses.

Do I have to use the cash basis?

No, but you’ll need to tell HMRC if you want to keep the old accrual basis. Otherwise, you’ll automatically switch to the cash basis from April 2024.

Can I switch back and forth?

Yes, you can choose which method to use each year. But be aware that you might need to make some adjustments to your figures when you switch to ensure everything’s counted correctly.

What should I do now?

1. Think about whether the cash basis would work for your business.
2. If you prefer the accruals basis, make sure you’re ready to tell HMRC.
3. Consider talking to an accountant if you need help determining which is best for you.

Remember, this change is designed to make life easier for small business owners. For most people, it should mean less paperwork and a simpler way of calculating their taxes. But as with any change, it’s worth taking a bit of time to understand how it affects you personally.