Cash‑Basis Default
UncategorizedMerranti

What Does the New Cash‑Basis Default Mean for Sole Traders and Partnerships?

From the 2024/25 tax year, a fundamental change to how small businesses report profits to HMRC will take effect — one that could simplify accounting for many, but also confuse those unprepared.

The change? For most sole traders and partnerships, the cash basis will become the default method for calculating profits, unless they actively choose otherwise. This marks a significant shift in tax policy and aligns with HMRC’s broader mission of simplifying compliance under the Making Tax Digital (MTD) initiative.

In this article, we explain:

  • What the cash basis is
  • What’s changed and why
  • Who it applies to (and who it doesn’t)
  • Pros and cons
  • What transitional adjustments are needed
  • What you should do now

Whether you’re a builder, web designer, landlord, shop owner or running a small partnership — this change affects you.

What Is the Cash Basis?

In simple terms, the cash basis of accounting means that you record income and expenses only when money actually changes hands. This is in contrast to the accruals (or traditional) basis, which records income when it is earned and expenses when they are incurred, regardless of when the cash is received or paid.

Example:

  • You invoice a client £1,000 in March 2025.
  • They pay you in May 2025.

Under accruals basis: You include the £1,000 in your 2024/25 tax return.
Under cash basis: You include the £1,000 in your 2025/26 tax return.

What’s Changing in 2024/25?

1. The Cash Basis Becomes the Default

Until now, the cash basis was available to certain small businesses — but they had to opt in. From the 2024/25 tax year, it becomes the default method for most sole traders and eligible partnerships. If you want to continue using the accruals basis, you’ll need to opt out on your tax return each year.

2. Turnover Limits Removed

Previously, the cash basis was only available to businesses with turnover under £150,000, and they had to switch back to accruals if turnover rose above £300,000.

Now, these thresholds are abolished. All sole traders and eligible partnerships can use the cash basis regardless of how much they earn.

This is particularly beneficial for:

  • Freelancers who start to grow their income quickly
  • Tradespeople taking on larger contracts
  • Consultants or service businesses scaling up

3. Wider Access for Partnerships

More partnerships will now qualify to use the cash basis. Previously, only those with individual partners (not corporate members) and no other business activity could opt in.

Although Limited Liability Partnerships (LLPs) remain excluded, ordinary partnerships now have more flexibility.

Who Can’t Use the Cash Basis?

While the reforms are extensive, the following are excluded from the new rules:

  • Companies and LLPs
  • Farming businesses using herd basis or profit averaging
  • Businesses involving Lloyd’s underwriters
  • Partnerships with corporate partners
  • Property rental businesses (although see below)
  • Businesses using averaging for creative industries (e.g., authors, musicians)

If you’re not sure whether your business is excluded, speak with a Merranti advisor for clarification.

Why Is HMRC Making This Change?

The new default aligns with HMRC’s vision for a simplified tax system under Making Tax Digital (MTD). In particular, MTD for Income Tax (MTD for ITSA) will require quarterly digital submissions from April 2026.

Using the cash basis means:

  • No need to track unpaid invoices or creditors
  • Easier to reconcile with bank feeds and digital records
  • More aligned with how small business owners manage cash day-to-day

Benefits of Using the Cash Basis

✅ Easier for New and Small Businesses

No complicated year-end adjustments for:

  • Accruals
  • Prepayments
  • Stock valuations
  • Capital allowances (in many cases)

This reduces both administration and accountancy costs.

✅ Better for Cash Flow Management

You only pay tax on money you’ve actually received, not just what you’ve billed. This can help smooth cash flow, especially for:

  • Seasonal businesses
  • Trades with long payment terms
  • Sole traders with irregular income

✅ No Tax on Bad Debts

If a client never pays you, it simply doesn’t count as income under the cash basis — no need to claim bad debt relief.

✅ Interest Deduction Limit Abolished

Under previous rules, you could only deduct up to £500 in interest charges when using the cash basis. That limit is now removed, allowing you to deduct full amounts of business finance costs, such as:

  • Overdraft interest
  • Equipment finance loans
  • Business credit card interest

✅ Improved Loss Relief

Previously, losses under the cash basis could only be carried forward. From 2024/25:

  • Losses can be set against other income in the same or previous year
  • Early years’ losses can be carried back up to three years

This aligns the cash basis with the flexibility of the accruals basis.

Drawbacks of the Cash Basis

⚠️ Less Accurate Profit Matching

Cash in/out doesn’t always reflect business performance. If you’re invoicing heavily at year-end but payments are delayed, your profits may appear low even though business is booming.

This may be misleading when:

  • Applying for finance or mortgages
  • Valuing the business
  • Planning for investment

⚠️ Transition Complications

Switching from accruals to cash (or vice versa) involves transitional adjustments to prevent double-counting income or omitting expenses:

  • Opening stock becomes deductible
  • Unpaid invoices previously declared must be removed from turnover
  • Outstanding bills previously deducted must be added back

This can be complex and will often need professional support to calculate correctly.

⚠️ Lenders and Investors May Prefer Accruals

Banks, investors and grant funders often request accruals-based financial statements because they give a fuller picture of performance. Cash basis may not be suitable where:

  • You’re seeking external finance
  • You want to sell the business
  • You need year-on-year comparability

Capital Expenditure and the Cash Basis

One of the biggest simplifications under the cash basis is how it handles capital purchases.

Under the accruals method, you’d typically need to claim capital allowances and spread the relief over several years.

Under the cash basis:

  • You can deduct most capital costs immediately
  • No need to calculate writing down allowances
  • Cars are excluded (still need to claim via capital allowances)

For example:

  • Buy a £3,000 computer → full deduction in the year of purchase
  • Buy a £20,000 van → full deduction (unless under finance)

Note: If a van is bought under HP or finance, there may be transitional adjustments required if moving from accruals to cash.

Real-World Example: Cash vs Accruals

Lucy, a freelance graphic designer, invoices £10,000 in March 2025, but the client pays in May 2025.

  • Under accruals, she reports £10,000 in 2024/25.
  • Under cash basis, she reports it in 2025/26.

This means she may delay the tax by a full year — helpful if she’s having a lean 2024/25 or if she’s investing in equipment and doesn’t want a large tax bill now.

How to Opt Out (If You Prefer Accruals)

The cash basis is now the default, but if your business benefits more from accruals, you can opt out by making an election on your Self Assessment tax return.

This election must be made annually. It doesn’t carry forward automatically.

What Should You Do Now?

 Check Your Accounting Method

If you’ve been using accruals but now qualify for the cash basis, speak with your accountant. It may be beneficial — but only if it aligns with your business model.

 Consider Future Plans

If you’re:

  • Planning to incorporate
  • Seeking finance
  • Applying for mortgages
  • Relying on performance-based data

… then accruals may still be better.

 Review Your Software

Cash basis accounting works best when linked to bank feeds and digital record-keeping, which MTD will soon require.

At Merranti Accounting, we can:

  • Help you choose the right cloud accounting solution
  • Set up bank reconciliations and digital reporting
  • Ensure you’re compliant with both MTD and HMRC expectations

How Merranti Accounting Can Help

We understand that tax changes can feel overwhelming — especially when they involve your livelihood.

Merranti Accounting supports:

  • Sole traders navigating MTD
  • Partnerships balancing growth and compliance
  • Startups who want simple, stress-free bookkeeping
  • Businesses switching accounting methods

We’ll guide you through:

  • Whether the cash basis is right for you
  • How to handle transition adjustments
  • Setting up software to match your accounting method
  • Staying compliant as MTD expands

Final Thoughts

The move to make the cash basis the default for sole traders and partnerships is part of a wider simplification agenda by HMRC — and for many businesses, it will deliver exactly that: simplicity.

But as with any tax change, one size doesn’t fit all. The cash basis can work brilliantly for smaller, cash-focused businesses, but might not be suitable for those with growing complexity, stock management, or investment plans.

Need tailored advice? Let us review your books, help you choose the right method, and ensure you get the best possible outcome for your business.

 Call us on 01342 836 557
 Or email: info@merrantiaccounting.com

Let us handle the accounting, so you can focus on running your business.

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