Switching between a cash and an accrual accounting basis is a vital aspect of managing your company's financial operations. This help article outlines the process of transitioning between these methods within your company's settings and provides insights into eligibility criteria and implications for VAT registered businesses based on information from HM Revenue and Customs (HMRC).
Changing Accounting Basis:
You have the flexibility to adjust your accounting basis at any time by following these steps:
- Access Settings: Navigate to 'Your Profile' > 'Company Settings.'
- Finance Settings: Within the settings, locate 'Finance Settings' and make the necessary adjustments to your accounting basis.
Understanding the Process:
- Consistent Recording: Each invoice or expense is recorded based on the accounting basis with which it was created.
- Workflow Consistency: The sequence of accounting remains consistent, ensuring accuracy even if an invoice is cancelled.
- VAT Reporting: Switching between cash and accrual methods does not result in duplicate entries on VAT returns.
Example Scenario:
- May 1st - Accrual Basis: Invoice A created with accrual accounting.
- May 5th - Switch to Cash Basis: Invoice B created under cash accounting; payment for Invoice A recorded using accrual method.
- May 10th - Reverting to Accrual: Payment for Invoice B recorded using cash method.
ℹ️ Note: We recommend checking with your Accountant before changing accounting & VAT basis between your tax period.
Cash Basis for VAT Registered Businesses:
- Eligibility: VAT registered businesses with an income of £150,000 or less during the tax year can use cash basis.
- Income and Expenses Recording: Businesses can record income and expenses either excluding or including VAT, ensuring consistency in treatment.
- Default Method: From April 6, 2024, cash basis becomes the default accounting method, with an opt-out option for traditional accounting or ineligible businesses.
Ineligibility for Cash Basis:
- Excluded Entities: Limited companies, limited liability partnerships, specific business types such as farming businesses with certain elections, etc., cannot use cash basis.
- Opting Out: Businesses ineligible for cash basis or preferring traditional accounting must opt out during Self Assessment tax return filing.
- Please refer to Cash basis: VAT registered businesses - GOV.UK (www.gov.uk) for more information
Accrual Accounting Basis (Traditional Accounting):
- Terminology: HMRC refers to accrual accounting as 'Traditional Accounting.'
- Seeking Assistance: Consult tax professionals or legal advisers for guidance on opting out or navigating accounting complexities.
Understanding the nuances of cash and accrual accounting methods is essential for effective financial management. By adhering to HMRC guidelines and leveraging the flexibility provided by Business Finance Assistant, businesses can optimise their accounting practices to suit their needs.