Expansion of Cash Basis for Unincorporated Businesses

Commencing from the tax year 2024/25, a change is set occur for eligible unincorporated businesses. The default method for calculating profits will transition to the cash basis, providing unincorporated businesses the option to choose the accruals basis if preferred. This shift is poised to simplify accounting procedures, offering increased flexibility for unincorporated businesses in managing their financial affairs.

Cash Basis

The cash basis method revolves around recording transactions when actual cash is received or paid. It simplifies accounting by focusing on the timing of cash inflows and outflows, providing a straightforward approach for unincorporated businesses, particularly those with uncomplicated financial structures. The emphasis on real-time cash movements makes the cash basis method generally easier to implement.

Accrual Basis

In contrast, the accruals basis recognizes transactions when incurred or earned, irrespective of when cash is received or paid. This method offers a more precise portrayal of a unincorporated business’s financial performance by recognizing revenue and expenses when they occur. Although comprehensive, the accrual basis can be more intricate due to its inclusion of non-cash transactions and accruals.

Lifting Restrictions

Previously, unincorporated businesses encountered restrictions to join the cash basis, such as a £150,000 turnover cap and mandatory transition to accruals basis at £300,000 turnover. These constraints have been entirely lifted, enabling unincorporated businesses of any size to opt for the cash basis unless they prefer the accruals basis. Exceptions include partnerships with a corporate member, limited liability partnerships, and those claiming farmers’ or artists’ averaging.

The transition to the cash basis as the default method for calculating profits heralds a milestone in tax simplification for unincorporated businesses. The removal of restrictions and the introduction of enhanced deductions and loss relief measures aim to foster a conducive environment for unincorporated businesses of all sizes, promoting growth and financial stability. As unincorporated businesses navigate these changes, a careful assessment of unique needs and structures becomes imperative for informed decision-making between cash basis and accrual basis accounting.

Further Information

If you would like to discuss the tool in more detail or your tax affairs in general, please contact your usual NRB advisor.


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