Cash Basis vs UK GAAP: Why the simpler option isn’t always better
Hayley Benn · Posted on: May 22nd 2025 · read
Until recently all but the smallest of businesses have been required to prepare accounts under UK Generally Accepted Accounting Practice (UK GAAP).
Published by the UK’s Financial Reporting Council, these accounting standards cover a wide range of accounting issues, but fundamentally they seek to define profit and therefore recognise income when it is earned and expenditure when it is incurred. This results in matching the income generated with the costs associated with generating that income.
Prior to 6 April 2024 most sole traders or partnerships with a turnover of less than £150,000 could choose to ignore UK GAAP and prepare accounts on a cash basis, recognising income when it was received and expenditure when it was paid.
However, in the Finance Bill 2023 it was announced that from 6 April 2024 the £150,000 limit on turnover would be removed and, subject to certain exceptions, most sole traders or unlimited liability partnerships would be able to adopt cash accounting.
‘The changes simplify small business taxation by extending eligibility for the cash basis, encouraging its use and making the rules for the regime easier to understand and apply. Making the cash basis the default method of calculating trading profits removes barriers to using it and reporting its use.’
As stated for tax purposes, the cash basis of accounting is now the default method of accounting for the majority of trade, unless they are an excluded trade. Businesses will need to opt into preparing accounts under UK GAAP. Businesses will be able to do this through the Self Assessment Tax Return.
Excluded Trades
There are exclusions, and excluded trades would need to meet any one of the following conditions set out in ITTOIA 2005 s25B:
- Condition A is that—
- the person who is or has been carrying on the trade is a firm, and
- one or more of the persons who have been partners in the firm at any time during the tax year was not an individual at that time.
- Condition B is that the person who is or has been carrying on the trade was a limited liability partnership at any time during the tax year.
- Condition C is that an election for trade profits: herd basis rules has effect in relation to the trade for the tax year.
- Condition D is that a claim for averaging of fluctuating profits has been made in relation to the trade for the tax year.
- Condition E is that, at any time within the period of 7 years ending immediately before the tax year, the person who is or has been carrying on the trade obtained an allowance under Part 3A of CAA 2001 (business premises renovation allowances) in relation to the trade.
- Condition F is that the trade is or was at any time during the tax year a mineral extraction trade
- Condition G is that—
- at any time before the beginning of the tax year the person who is or has been carrying on the trade obtained a research and development allowance in respect of qualifying expenditure incurred by the person in relation to the trade, and
- the person owns an asset representing the expenditure.
Private Client Tax
Read more about Private Client TaxRead moreUnder MTD, businesses will submit returns to HMRC quarterly, and cash accounting will make this process simpler. So should businesses switch away from UK GAAP and prepare accounts on a cash basis or, would this result in allowing the tax tail to wag the dog?
Let’s look at some of the pros and cons of the two bases for preparing accounts.
| Pros | Cons |
|---|---|
| Accounts preparation may be simpler as businesses will not have to make year-end accounting adjustments. They will be able to ignore the usual adjustments for debtors, creditors or stock. | Cash accounting does a good job of tracking cashflow but does not match the income earned with expenses incurred. Simple cash accounts will not give a true picture of the business performance and profitability. It does not provide the information required for strategic decision making and managing a business. |
In the year of changing to the cash basis, there may be a delay in the tax liability, however this delay would only be temporary.
| Banks and other lenders are likely to be reluctant to lend based on accounts prepared under cash accounting as they don’t show the true performance or show the extent of the business’ liabilities. They may well require accounts to be prepared under UK GAAP. Similarly, businesses with existing loans linked to bank covenants will probably be required to prepare accounts under UK GAAP to ensure the covenants are met. |
| There may be some ability to control tax liabilities by shifting the timing of payments from one year to another. Although this would be a timing difference rather than an overall saving. | Where a business prepares accounts on a cash basis this will have some significant implications where partners are joining and leaving a partnership. Where accounts are prepared on a cash basis, a partner retiring on 31 March would not receive their share of the debtors normally included in the accounts. Similarly, as the accounts do not reflect creditors, a retiring partner would not necessarily bear their share of the outstanding liabilities. Therefore, accounts prepared on a cash basis are unlikely to result in accounts that would be considered a fair basis for dealing with partners who are joining or leaving a partnership. |
| As mentioned above it may make some aspects of complying with MTD easier | Where there are changes in a partnership, accounts prepared on a cash basis could be susceptible to manipulation. For example, a retiring partner might delay paying large payments such are the rent payment until the following month once they have left the partnership. Again, it is hard to see how fairness could be assured. |
| As a result of the way in which capital expenditure is accounted for under cash accounting it is difficult to see how this would be equitable for new or retiring partners. |
Is cash basis right for your business?
While there may be some limited advantages from using cash accounting, we believe that most businesses will conclude that cash accounting does not provide the information required to manage a business efficiently and that they will not provide a fair basis for partnership changes.
Where businesses have concerns on this subject, they should discuss this with us. Having reached their conclusion, the business should ensure that the basis on which the accounts are to be prepared is set out in the partnership agreement.
MHA can help
Our tax experts understand the challenges that businesses and individuals face to meet the evolving regulations from HMRC, and we can help guide you in navigating your compliance obligations.
Please contact our private client tax team to discuss this matter further, or with any other tax-related queries.
