The default for preparing accounts for sole traders and partnership is the accruals basis - or what we habitually refer to as proper accounts. That means they show how much profit you really made in a period, regardless of when you remembered to send an invoice, or when your customers actually paid you, or when you paid your suppliers and so on. Accounts are supposed to be a useful record of how a business is really doing, giving you important information about what’s working and what’s not working, and, in extremis, whether you’re wasting your life and should get a job. They’re not just a glorified bank statement or a reflection of the admin inefficiencies of you, your customers or your suppliers in sending out paperwork or making payments.
For a few years now, small sole trade and partnership businesses have been able to base their tax returns on cash in and out instead, so as to make preparing tax returns easier (and also as an acknowledgement that many of them were doing it already). Accountants will rarely use this cash basis, as preparing proper accounts isn’t hard and gives you useful information, though sometimes there can be some benefit to using it for a year or two in niche circumstances where the timing of payments happens to result in a worthwhile tax saving. But generally, proper accounting is the way to go. It’s nice if accounts can be useful AND as easy to prepare as possible - but if you have to pick one, it should be the first.
Anyway, regardless of all that, from 2024 the cash basis will become the default for unincorporated businesses, with an option to use the accruals basis.
The reason for this is basically Making Tax Digital and the ongoing intention (which may or may not ever happen - we’re nine years into the process now) to make sole traders submit quarterly updates to HMRC of their income and expenditure. The government has realised that this will be easier to sell if people are just submitting what their bank statements say rather than having to properly account for their real earnings for the quarter. Part of the drive to this reporting is so as to be able to make more regular assessments of entitlement to things like Universal Credit and Tax-Free Childcare, and a sole trader with smooth underlying income but erratic payments from customers could have interesting problems with their claims if and when this quarterly reporting ever comes in. But for now, we’ll just need to watch this space. For avoidance of doubt, we (along with most or all other competent accountants, we imagine) will continue to default to proper accounts!
Comments