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Cash Basis for Sole Traders | Should I use cash basis for my tax return?

Cash Basis for Sole Traders | Should I use cash basis for my tax return?

Mike Wakeford

What is the cash basis scheme
The cash basis scheme helps sole traders and other unincorporated businesses benefit from a simpler way of managing their financial affairs. The scheme is not open to limited companies and limited liability partnerships. The cash basis scheme allows qualifying businesses to use the cash basis when recording income and expenditure. However, this cash basis scheme is not appropriate for all small businesses.
If a business falls within any of the following categories, the cash basis may not be the best option:

What types of business dont need to use the cash basis scheme

  1. They want to claim interest or bank charges of more than £500 as an expense;

  2. They run a business that’s more complex, e.g., have high levels of stock;

  3. They need to get finance for the business - a bank could ask to see accounts drawn up using traditional accounting to see what the business owes and is due before agreeing a loan; or

  4. They have losses that the owner wants to offset against other taxable income ('sideways loss relief').

About the cash basis scheme
The cash basis scheme is most suitable for straightforward businesses, especially those that provide services. Businesses must have a turnover of £150,000 or less to join the scheme and can continue using the scheme until the business turnover reaches £300,000.

What are the changes to the cash basis sheme
HMRC issued a consultation earlier this year looking at extending the scheme. The consultation closed on 7 June 2023 and HMRC has now published confirmation of the changes that will take place.
The government will:

  1. remove the turnover thresholds for businesses to use the cash basis;

  2. set the cash basis as the default method of calculating taxable profits, with an opt-out for the accruals basis.

  3. remove the £500 limit on interest deductions in the cash basis, aligning the rules with the accrual’s basis; and

  4. remove the restrictions on using relief for losses made in the cash basis, aligning the rules with the accruals basis.

  5. The changes will come into effect from April 2024.

Contact us
If you’re a sole trader and want to make the most of the changes to the cash basis scheme, please contact our team today who can help you make the most of the changes to the cash basis scheme or advise you if the cash basis is beneficial for your business.

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