HMRC are reminding the self-employed and those in partnerships that the cash basis is the default accounting method from tax year 2024/25 onwards.
Schedule 10 of Finance Act 2024 made the legislative change and applies for the applicable taxpayers submitting Self-Assessment returns. Therefore, the first return for which this will be required is the 2024/2025 return, due online by 31 January 2026.
HMRC advise that the following changes apply:
- The turnover limits of £150,000 and £300,000 have been removed. This allows eligible self-employed people and partnerships of any size to use the cash basis
- Loss restrictions have been removed so both the cash basis and accruals accounting businesses will be subject to the same tax rules. This will allow cash basis users to set their losses off against other income
- Interest restrictions (£500) have been removed so both cash basis and accruals accounting will be subject to the same tax rules, allowing cash basis businesses to deduct all their business interest.
- People with more than one business can choose whether they use the cash basis or accruals accounting for each business they have, rather than having to pick one method for all their businesses
HMRC’s communication reminds taxpayers and agents that the cash basis is the default but there is an option to opt out.
For Bookkeepers
The cash basis requires records to be kept aligned to income and receipts in the tax year. However, although this is the default, there are some categories that cannot use this and, just as importantly, there are some taxpayers that will not want to use this – see HMRC’s guidance ’When cash basis might not suit your business’. So, it may be that a taxpayers cannot use the cash basis or does not want to use the cash basis and will remain with the ‘traditional accounting’ method. This method aligns income and expenses by the date of invoice or billing rather than aligned with the tax year.
Most importantly, if you have a client that is excluded from using the cash basis or wants to retain using the traditional accounting method, you need to indicate this on the Self-Assessment tax return. Essentially, you are opting them out of the default.
