Clive Owen LLP

In a significant development aimed at streamlining financial reporting for businesses, HM Revenue & Customs (HMRC) has announced a new basis of accounting for sole traders and partnerships.

Effective from 6 April 2024, these businesses will have the option to report their profits based on cash and bank transactions, moving away from the traditional accrual basis of accounting. This change comes as part of the preparations for the Making Tax Digital initiative, set to be introduced in April 2026.

Lee Watson, tax partner at Clive Owen LLP, a leading firm of chartered accountants and business advisers with offices in Darlington, Middlesbrough, Durham, and York, sheds light on the current practice and the implications of the new system.

"Currently, the majority of businesses are required to prepare their accounts on an accruals basis, declaring income billed but not received by the year-end, and claiming expenditures not yet paid but due. This can be cumbersome and not reflective of a business's actual cash flow.”

The shift to a cash-based accounting system will become the default for sole traders and normal partnerships, although they can opt to continue with the accruals basis if they prefer. This move is expected to simplify financial reporting significantly, aligning profit declaration with the tax year following the basis period reform.

"Moving from accruals to a cash basis will necessitate adjustments in the transition year, particularly concerning previously taxed income and accrued expenses," Lee adds, highlighting the practical considerations businesses must address.

However, not all entities will benefit from this change says Lee: "Limited liability partnerships (LLPs) and limited companies will continue to report on an accruals basis. Those operating within these structures may consider converting to a different business medium, though this requires careful consideration of the commercial and taxation implications.”

The introduction of cash basis accounting could however have broader implications for business owners, particularly in how lenders perceive profits and indeed HMRC. "Cash basis profits could significantly fluctuate, affecting mortgage applications or resulting in higher tax charges if profits fall into different tax thresholds," Lee cautions, pointing out the potential for increased financial volatility.

Ian Jarvis, managed services partner added: “While cash-based accounting may simplify taxes, it doesn't give a clear picture of business performance, which is crucial for larger sole traders and partnerships. Accrual accounting, almost universally used in business reporting, provides this essential performance insight. This means that businesses will need to carefully consider their position and what will work best for them.”

ENDS

NEWS RELEASE: ISSUED ON BEHALF OF CLIVE OWEN LLP

CONTACT: Caroline Walker on 01325 363436

Notes to editors:

Clive Owen LLP are Chartered Accountants and Business Advisers.

The firm has 13 partners and 134 staff across four offices in Darlington, Middlesbrough, Durham and York.

It is an independent and commercially driven regional accountancy firm providing value added services to corporate, commercial, public sector and private clients.

Over the past forty years the firm has established itself as one of the largest and most trusted professional firms in the North East. This has been achieved by working closely with its clients to understand their needs and aspirations to ensure they achieve their financial goals.

Its services include:

Audit and Accountancy

Tax

Business Planning

Managed Services

Corporate Finance

Grants

It is a member of Kreston Global which is a worldwide network of independent accountancy and advisory firms.

Founded in 1971, Kreston offers reliable and convenient access to high-quality services through member firms located around the globe. Currently ranking as the 12th largest accounting association in the world, Kreston now covers 125 countries providing a resource of over 25,000 dedicated professionals.

This global network can be of huge value to our clients who can benefit from enhanced research coverage, local market knowledge, and cross-border professional expertise.