Cash basis accounting is now the default method for self-employed individuals and partnerships, but you can opt out and carry on using the accruals basis instead.

HMRC introduced the change as a way to simplify accounting for small businesses. But in fact the new system appears to be aimed at facilitating the introduction of Making Tax Digital (MTD) for income tax. MTD is set to start in April 2026 for individuals with qualifying income over £50,000 and April 2027 for qualifying income over £30,000. No start date has been announced for MTD for partnerships.

Drawing up accounts based on cash in and out is certainly simpler, making it easier to provide the quarterly accounting information that MTD will require. But annual profits may fluctuate wildly when expenses are paid in a different accounting period from the receipt of the related income, and stock and work in progress are not taken into account.

That may result in years when taxable income unexpectedly jumps into a higher tax band than if it accrued more evenly. It also makes budgeting and cash flow challenging and makes it harder to work out how profitable your business really is.

Time payments with care

However, by the same token and with care, you may be able to plan your payments and receipts to ensure you stay below a relevant income tax threshold. You could buy stock and pay your suppliers early if you think your profits may be more heavily taxed in this tax year rather than next, or delay payments in the converse situation, although you need to maintain a good relationship with your suppliers, especially if you are paying subcontractors.

On the income side, although you might not be able to persuade your customers or clients to pay you early, you could postpone income by delaying invoicing, or even ask a customer to hold off paying your invoice until after the year end.

The change to cash basis accounting as the default method does not apply to VAT, which continues to be payable on the difference between sales invoices and purchase invoices. Businesses can elect for the VAT cash accounting scheme but only if their VAT taxable turnover is £1.35 million or less.

If you have to wait for payment from your customers, cash accounting should benefit your business. But you should take advice for your particular circumstances for both VAT and income tax.