Accruals Basis Accounting, Cash Basis Accounting, Simplified Accounting can be confusing terms, and have different meanings in different circumstances. Here is a closer look.
Cash Basis is known to many businesses from VAT, but its application to Income Tax differs.
From April 2024 Cash Basis Accounting for Income Tax is standard for Unincorporated Businesses, with an opt out back to Accruals Accounting.
Cash Basis v Accruals Basis Accounting – Income Tax
Cash Basis Accounting means transactions are reported for Income Tax according to the date they are paid or received.
Accruals Basis Accounting for Income Tax means transactions are matched to the period they relate to, eg:
- Income is reported when earned rather than received.
- Expenses are reported when they are incurred, rather than when paid, and if necessary matched against the period the income is earned in.
From April 2024 Cash Basis becomes the default for Unincorporated Businesses (Sole Traders and Partnerships) although they will be able to elect into Accruals Accounting.
Circumstances when you may wish to elect into Accruals Basis:
- You’ve received monies in advance, eg for a retreat or training, and you won’t incur costs until a later tax year – Accruals Basis allows you to match income and expense
- If you have monies owing to you, eg from corporate customers, and you are concerned to maximise profits, eg for a mortgage
- These circumstances are likely to be uncommon for Yoga Teachers, so in most instances there is no merit in electing into Accruals Basis.
Lets look at an example:
Pat’s business year end is 5 April annually in line with tax year. She is engaged on a commissioned project, with cash flow as follows:
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- She receives deposits from guests of £1,000 in March 2025
- She receives balances from guests of £4,000 in May 2026
- She pays a deposit for the venue of £2,000 in June 2025
- She pays the balance for the venue of £1,000 in April 2026
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Under Accruals Basis Accounting this is all reported in 2026/27 – Income of £5,000 and expense of £3,000
Under Cash Basis Accounting, she reports:
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- 2024/25 Income £1,000
- 2025/26 Expense £2,000
- 2026/27 Income £4,000 Expense £1,000
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Cash Basis Accounting means some income is taxed earlier, and some expenses are relieved earlier. Income and expenses are split over three years. This can cause unexpected variations in taxable profits and tax liabilities.
A few points to note:
- For most small businesses, which tend to be quite simple and not buy or sell on credit, Cash Basis Accounting tends to happen automatically.
- For businesses who take or make deposits, hold stock or work in progress, or buy or sell on credit, Accruals Basis Accounting tends to be preferred as it makes sure transactions are matched.
- You do not have to use the same accounting basis for VAT and Income Tax.
- This applies to Sole Traders, Partnerships and LLPs.
HMRC guidance on Cash Basis for Income Tax
Purchases of Equipment and Vehicles
Purchases of equipment and vehicles need some understanding.
Equipment and Vehicles other than cars:
- Under Accruals Basis accounting, all equipment and vehicles are dealt with via Capital Allowances but there is normally 100% Annual Investment Allowance (AIA).
- Under Cash Basis accounting, all equipment and vehicles are expensed in the profit and loss. In tax terms this is the same as 100% AIA but the presentation is different.
- Private Use adjustments are necessary in both instances.
- Sales of equipment and vehicles reverse the relief originally given, so:
- Under Accruals Basis accounting the disposal proceeds go back into Capital Allowances and create a Balancing Charge
- Under Cash Basis accounting the disposal proceeds go back into the profit and loss as income
- In practical terms this is likely to give the same tax result, but with a different presentation.
Either way the purchase and sale of equipment and vehicles can lead to fluctuations in profits and tax costs.
Cars are treated differently:
- Under both Cash Basis and Accruals, cars are dealt with via Capital Allowances. Writing Down Allowances will be available.
- Writing Down Allowances are normally 14% or 6% (2026-27 rates) depending on emissions.
- Private Use adjustments are necessary in both instances.
- When a car is sold it goes back into Capital Allowances and there will be a Balancing Charge or Balancing Allowance depending on the Capital Allowances Pool – if the 14% / 6% Writing Down Allowances haven’t kept up with the decline in the cars value, the balance is given as a Balancing Allowance.
- Often it is easier to expense cars on a mileage basis – see “Simplified Accounting” below.
The take away here is to plan purchases and sales of assets carefully.
Corporation Tax
Companies are not allowed to use cash accounting for Corporation Tax, and must account on an accruals basis.
Simplified Accounting
Simplified Accounting is an HMRC scheme to simplify some expenses for small businesses under Self Assessment for Income Tax.
It covers:
- Vehicle Costs
- Working from Home Costs
- Expenses if you live on your business premises (eg a flat over a studio)
HMRCs guidance is here, and our guidance on Car Costs and Working From Home / Home As Office Expenses reflect the Simplified Accounting guidance.
Our advice is to use the simplifications where appropriate.
Cash v Accruals Accounting – VAT
The rules for Vat are independent of those for Income Tax, although in practice you will normally align.
For Vat Cash Accounting means transactions are reported for Vat according to the date they are paid or received.
Accruals Accounting, also known as Invoice Accounting, for Vat means transactions are reported by reference to the date of the invoice. This is the default for Vat accounting.
For Vat registered yoga businesses Cash Accounting is simpler, more logical, and normally not detrimental. However if you have a large number of suppliers who you deal with on an account basis and pay later on, eg 30 or 60 days, then accruals accounting may slightly advance your Vat Input Tax claims – unlikely to be a concern for most yoga businesses.
You are eligible to join cash accounting for Vat if your turnover is less than £1.35m.
If you use the Flat Rate Scheme then you will automatically be using a form Cash Accounting.
HMRC Guidance on Cash Accounting for VAT