Cash basis extended | Severn Accounting

The Cash Basis Scheme has long been a welcome relief for many small business owners in the UK. Rather than grappling with the complexities of accruals accounting, the cash basis allows eligible businesses to report income and expenses based on actual cash movements. However, from 6 April 2023, the eligibility threshold for the scheme expanded, opening doors to more businesses. If you’ve been considering the cash basis or wondering whether you’re now eligible, this post covers what changed and how it might benefit your business.

What is the Cash Basis Scheme?

For those unfamiliar, the cash basis is a simplified method of calculating taxable profits. Instead of recognising income when you invoice a client or expenses when you receive an invoice, you record them when money actually enters or leaves your bank account. This approach can significantly reduce administrative burden, especially if you’re managing cash flow manually or working with a small accountancy team.

The scheme is available to sole traders and partnerships, and it’s particularly popular with freelancers, tradespeople, and service-based businesses. The key advantage? Fewer records to maintain and potentially easier tax returns.

The Extended Threshold

Until 5 April 2023, the cash basis was only available to businesses with turnover below £150,000. From 6 April 2023, HMRC raised this threshold to £300,000—doubling the eligibility window in a single change. This means considerably more UK businesses can now benefit from simplified accounting.

If your turnover falls below £300,000 and you meet the other eligibility criteria, you can now elect into the scheme. This is particularly significant for growing businesses that have outpaced the old threshold but still operate relatively informally. Rather than overhauling your entire accounting system at a critical growth stage, you can continue with the cash basis approach.

It’s worth noting that the threshold applies to your turnover for the tax year in question. If you exceed £300,000 in any tax year, you’ll be required to leave the scheme and revert to accruals accounting from the following tax year. HMRC will notify you if this applies to your business.

Who Can Use It?

Not every business is eligible, even if turnover is below £300,000. The cash basis isn’t suitable for:

Partnerships with a corporate partner
Certain professional businesses (accountants, solicitors, auditors, and similar)
Businesses that trade in financial instruments
Businesses that aren’t within the UK tax-resident regime

If you’re unsure whether your business type qualifies, it’s worth checking with your accountant or reviewing HMRC’s detailed guidance. Many service-based businesses and sole traders, however, find themselves in the clear.

Practical Advantages for Your Business

Beyond simplicity, the cash basis delivers tangible benefits. First, there’s the accounting cost—many accountants will charge lower fees for cash basis returns than accruals-based ones, since less adjustment work is required. Second, there’s the working capital advantage: you don’t report income as profit until it’s physically received, which can ease cash flow pressure during growth phases.

However, the scheme does have limitations. You can’t claim relief for bad debts (money owed by clients you never receive), and certain reliefs—such as capital allowances for plant and machinery—may be restricted. Additionally, if your business involves inventory or stock, the cash basis becomes unwieldy, and you’ll need specialist advice.

Making the Election

Electing into the cash basis is straightforward. You simply declare your preference on your Self Assessment tax return or notify HMRC directly. Once elected, you’ll continue using it for subsequent tax years unless you choose to leave or are required to do so (for example, if turnover exceeds the threshold).

The process is genuinely low-friction, but it’s important to consider whether the scheme genuinely suits your business operations. If you’re already using accounting software set up for accruals, or if your business model requires detailed profit tracking across multiple projects, switching might create more work than it saves.

Conclusion

The extended threshold represents a genuine opportunity for growing businesses to maintain simpler accounting practices whilst scaling up. Whether the cash basis is right for your business depends on your turnover, your business type, and your operational complexity. It’s not universally better—it’s simply a tool that works brilliantly for certain situations.

If you’re operating below £300,000 turnover and haven’t considered the cash basis, it may be worth revisiting. Conversely, if you’re already in the scheme, the expanded threshold means you have more breathing room before migration becomes necessary.

For tailored advice, contact Severn Accounting — we’re here to help.