Timing your payments around the year end

For unincorporated businesses, from 6 April 2024 onwards the cash basis is the default basis of accounts preparation. Unlike the accruals basis under which income and expenditure must be matched to the accounting period in which they occur, the cash basis simply records money in and out. This fundamental difference has important implications for year-end planning, particularly when it comes to timing your payments and receipts.

Understanding which basis your business uses is crucial because it directly affects your taxable profit calculation and, consequently, your Self Assessment tax bill. For many small traders, sole traders, and partnerships, the cash basis can offer genuine advantages—but only if you’re strategic about managing your cash flows around the year end.

How the Cash Basis Changes Year-End Planning

Under the cash basis, what matters is when money actually lands in your bank account or leaves it, not when you’ve invoiced a customer or received an invoice from a supplier. This creates genuine planning opportunities that didn’t exist under the traditional accruals method.

If you’re approaching your year-end (typically 5 April for tax purposes, or your chosen accounting date) and you know you’re facing a significant tax bill, you have more flexibility than many business owners realise. By adjusting the timing of payments to suppliers, you can legitimately reduce your taxable profit for the current year.

The key word here is legitimately. The timing must reflect genuine business activity; HMRC is well aware of artificial schemes designed purely to manipulate figures, and they actively pursue these. However, if you genuinely need to pay a supplier in April rather than March, or you can reasonably defer a payment, there’s nothing wrong with arranging this strategically.

The Rules Around Timing Payments

Not all payments can be manipulated for tax purposes, and it’s essential to understand the boundaries. Utility bills, rent, insurance, and professional fees can generally be deferred if there’s genuine business reason to do so—for instance, negotiating monthly payment terms or rescheduling a service contract.

However, capital expenditure on equipment or property follows different rules. Under the cash basis, capital purchases don’t generate an immediate tax deduction; instead, you claim capital allowances, which are worked out separately. So paying for a new van in March versus April affects your capital allowances claim rather than your profit calculation for that year.

Wages and salaries present another important consideration. If you pay yourself a salary, PAYE and National Insurance obligations arise on the payment date. Deferring wages purely for tax purposes can create complications, particularly if HMRC suspects the arrangement isn’t genuine. Additionally, if you operate through a limited company (which uses accruals accounting), the rules around connected party payments are stricter still.

Receipt Timing and the Cash Basis

The flip side of paying suppliers is receiving income from customers. Again, the cash basis offers flexibility—income is only taxable when it’s received. If a customer owes you money but won’t pay until April, that debt doesn’t count as taxable income until the cash arrives.

This can work in your favour in some circumstances, though you’ll want to factor in genuine commercial reality. Chasing invoices artificially to defer payment might damage client relationships, which rarely justifies modest tax savings.

Practical Steps for Year-End Planning

Start by reviewing your outstanding invoices and supplier bills. Identify what’s genuinely flexible and what’s fixed. Speak to your suppliers about payment terms—many are amenable to adjusting timing, especially if you’re a good customer.

Look at your planned expenditure. If you were considering new equipment or software, timing this before year-end might make sense for other reasons; just remember that capital allowances, not profit reduction, is the relevant tax mechanism.

Finally, calculate the actual tax saving before going to substantial effort. If you’re in the basic rate (20%) band and you save £1,000 in costs, that’s only £200 in tax saved. If the effort or inconvenience outweighs this, it may not be worth the bother.

Conclusion

The cash basis offers genuine planning opportunities, but these work best when they align with your genuine business operations. Year-end timing decisions should never distort your actual financial activity or create artificial arrangements designed purely to avoid tax.

For tailored advice on your specific circumstances—including whether the cash basis is genuinely optimal for your business—consider your tax position holistically. Every business is different, and what works well for one trader might not suit another.

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