Self-employed: Change of default accounting basis to cash basis

Please note: 'cash basis accounting' referred to in this article should not be confused with 'VAT cash accounting'.

From 6 April 2024, the default method of accounting for taxable profit for unincorporated businesses, will change from the accruals basis to the cash basis.

Self-employed business owners and partners who wish to use the accruals basis will need to ‘opt-in’ to use the accruals basis by ticking the relevant box on their self-assessment tax return.

If you already use the accruals basis (i.e. you use the customers and suppliers ledgers in VT Transaction+), it is easier to opt to use the accruals basis on your tax return, than to change your accounts to the cash basis.

The annual turnover thresholds of below £150,000 to start using the cash basis and £300,000 or above to have to leave the cash basis, have been abolished.

What is cash basis accounting?

What is accruals basis accounting?

How will the changes affect my business?

Can VT Transaction+ convert the accounts from accruals basis to cash basis?

Can the cash basis be used in VT Transaction+?


What is cash basis accounting?

This means accounting for income and expenditure when payment is received or made.

What is accruals basis accounting?

This means accounting for income when it is earned and expenditure when it is incurred, regardless of when payment is received/made.

For example, if you sell goods to a customer in March 2024 but they do not pay you until June 2024, the income is accounted for in March 2024.

If you use the customers and suppliers ledgers in VT Transaction+, then you are accounting under the accruals basis, since VT Transaction+ accounts for income on a sale when you enter a sales invoice in the customers ledger (and similarly, expenditure is accounted for when you enter a purchase invoice in the suppliers ledger).

How will the changes affect my business?

Businesses currently using cash basis accounting:

You can continue to prepare your accounts as you have been doing, as the cash basis will be the default method of accounting. You will no longer need to opt-in to use the cash basis on your self-assessment tax return.

Furthermore, you will no longer need to leave the cash basis once reaching a certain turnover threshold.

Business currently using accruals basis accounting:

If you wish to continue to use the accruals basis, you will have to ‘opt-in’ by ticking the relevant box on your self-assessment tax return. By opting-in to use the accruals basis, you can continue to prepare your accounts as you have been doing.

If you wish to change to the cash basis, you will need to start accounting for income and expenditure when payment is received or made. You will also need to make accounting and tax adjustments that arise from the transition. This can be a complex undertaking, therefore if you wish to change to the cash basis, you should speak to an accountant. Unfortunately, VT Software cannot provide advice on this matter.

Can VT Transaction+ convert the accounts from accruals basis to cash basis?

No. If you wish to change from the accruals basis to the cash basis you will need to make the necessary adjustments to convert your accounts (any adjustment can be recorded in VT Transaction+ by a journal entry - the JRN transaction type).

Unfortunately, VT Software cannot advise on these adjustments. Therefore, you should speak to an accountant if you wish to convert your accounts from the accruals basis to the cash basis.

Alternatively, you can continue to use the accruals basis if you opt-in to do so by ticking the relevant box on your tax return.

Can the cash basis be used in VT Transaction+?

VT Transaction+ is designed for accruals basis accounting. The chart of accounts templates contain customers and suppliers ledgers, which enable income and expenditure to be accounted for when you enter invoices to customer and supplier accounts.

However, you can prepare your accounts under the cash basis by not using the customer and suppliers ledgers, and instead, recording sales and purchases when payment is received/made using the REC (receipt) and PAY (payment) transactions.

If you are currently using the accruals basis, and wish to change to the cash basis, you will need to manually convert your accounts from the accruals basis to the cash basis.