Cash basis has now been the default method for calculating taxable profits for eligible sole traders and partnerships since 6 April 2024. For many businesses, the change reduced year-end adjustments and aligned the tax calculation more closely with money actually received and paid. That can help where customers take time to settle invoices or where the owner wants a straightforward link between bank activity and taxable profit.
At the start of 2025, the UK had an estimated 3.2 million sole proprietorships and 368,000 ordinary partnerships, according to the Department for Business and Trade’s 2025 estimates (DBT, 2025). The same release found that 75% of private-sector businesses had no employees apart from their owners.
A simpler tax calculation, however, does not automatically provide the clearest view of business performance. After a full year, owners should assess whether cash basis still supports their plans, reporting needs and financing arrangements. A method that suited a small consultancy may become less useful once the business carries stock, takes on longer contracts or seeks external funding. The right answer depends on how the business operates, rather than turnover alone, and should be reviewed annually.
Where cash basis continues to work well
Under cash basis, income is generally recorded when payment arrives and expenses when they are paid. An unpaid invoice does not enter the taxable profit calculation until the customer settles it. HMRC describes this as the standard approach for eligible sole traders and partnerships without corporate partners, with traditional accruals accounting available by election (HMRC, 2026).
A consultant might issue a £20,000 invoice on 25 March 2027 and receive payment on 20 April 2027. Under cash basis, the income falls into 2027/28. Under accruals, it would normally be recognised in 2026/27 because the work was completed before 5 April.
Cash basis may suit businesses with limited stock, short assignments and simple payment cycles. It reduces the need to account for debtors, creditors, accruals and prepayments when calculating taxable profit. Most equipment purchases, other than cars, are treated as allowable expenses rather than through capital allowances.
The 2024 reforms also removed the former turnover limits, £500 interest cap and restriction on trading loss relief. Good records remain essential, and our bookkeeping support can help owners retain consistent evidence for income, expenses and business use.
When accruals may give a better answer
Accruals accounting records income when it is earned and expenses when they are incurred. This often gives a fuller view of performance because it includes unpaid invoices, supplier bills, stock and work in progress.
A wholesaler might buy £40,000 of stock shortly before the year end and sell most of it during the following quarter. Cash basis could recognise the purchase when paid, creating a sharp fall in taxable profit even though much of the stock remains unsold. Accruals would carry the unsold stock on the balance sheet and match its cost against later sales.
Accruals may deserve serious consideration where the business:
- Carries stock or work in progress: Large year-end balances can make cash-based profit volatile.
- Offers extended credit: Debtors may be commercially important before payment is received.
- Uses supplier credit: Unpaid costs and liabilities may be absent from a cash-based year-end picture.
- Needs finance: Banks and investors may want accounts showing debtors, creditors and stock.
- Runs long contracts: Profit may need to reflect completed work rather than staged payment dates.
Tax accounts and management information do not have to use the same approach. A business can use cash basis for its tax return while producing fuller internal reports. Our management accounts service can provide that operational view.
What to review after the first year
The review should start with actual results rather than an assumption that the default method must remain suitable. We would compare cash-based taxable profit with an accruals view, separating temporary timing differences from signs that reporting is becoming less useful.
Areas to examine include:
- Customer payment patterns: Measure overdue invoices and identify collection problems.
- Stock levels: Check whether year-end purchases are causing large swings in profit.
- Capital spending: Review whether investment is producing uneven results.
- Borrowing and interest: Confirm that finance costs relate wholly and exclusively to the trade.
- Losses: Consider how current or expected losses could be relieved.
- Decision-making: Test whether reports support pricing, recruitment, drawings and investment.
Owners should also compare tax payments with the cash available to fund them. Cash basis can defer tax on unpaid invoices, but several older debts collected together can increase taxable income sharply. A strong quarter for receipts may therefore create a larger bill than recent trading activity suggests.
Switching basis needs careful handling
Moving to accruals requires more than changing a setting in accounting software. Transitional adjustments prevent income being taxed twice, expenses being relieved twice or items falling between the two methods.
HMRC states that a business leaving cash basis must calculate an overall adjustment. A negative adjustment is generally deducted in the change year. A positive adjustment is treated as business income and is normally spread over six years, beginning with that year, although elections and special circumstances can affect the treatment (HMRC, 2026).
The calculation can include unpaid invoices, supplier balances, stock and other amounts treated differently under cash basis. Invoices raised before the switch but still unpaid may need to enter the adjustment because they would not otherwise be recognised in the new accruals period.
A large positive adjustment can increase taxable income for several years, while a negative adjustment may reduce profit immediately. The change can also affect forecasts, drawings and finance applications. We recommend modelling both methods before making the election and recording the commercial reasons for it.
Make cash basis serve the business
Cash basis remains a sound choice for many sole traders and partnerships. It can reduce year-end administration, defer tax on unpaid sales and make the tax calculation easier to follow. The removal of turnover, interest and loss-relief restrictions has also addressed several weaknesses of the old regime.
The risks become more apparent as a business grows. Stock, work in progress, longer payment terms and external finance can make a cash-only picture less useful. A low taxable profit may reflect payment timing rather than weak trading, while a high figure may result from collecting earlier invoices. Neither should be assessed without supporting commercial information.
After one complete year, we suggest comparing both methods, reviewing the transitional cost of any switch and deciding what information partners, lenders and managers need. Even where cash basis remains appropriate for tax, monthly or quarterly accruals-based reporting may improve control over margins, debtors and future cashflow.
The decision should be revisited when the business changes materially. New premises, substantial stock, a major contract or increased borrowing can alter the balance. Regular review is more effective than waiting for poor information or an unexpected tax bill to expose the problem.
For a specific next step, ask us to complete a cash basis review before your 2026/27 accounts and tax return are finalised. We will compare the methods, quantify any switching adjustment and explain the effect on tax, reporting and cashflow. Contact our team to arrange the review.