Cash accounting for businesses and medical practices

Starting from the 2024/25 tax year, there are several significant changes to how small businesses and partnerships can prepare their accounts. Cash accounting will become the default method for calculating taxable profits for unincorporated businesses. Previously, only businesses with a turnover below £150,000 were able to use cash accounting and had to opt in to do so, whilst accepting a number of limitations which have now largely been removed. Businesses will now need to opt out if they prefer to use the accruals basis, although there are specific types of business which remain unable to use the cash accounting basis.

The changes aim to ‘simplify’ the tax process for small businesses and provide more flexibility in managing their finances, as well as supporting the implementation of Making Tax Digital (MTD), whereby businesses will need to submit quarterly returns to HMRC.

What is the cash accounting basis?

• Cash accounting involves recognising income when received and expenses when paid. It’s straightforward and can be suitable for smaller businesses.
• In contrast, accrual accounting recognises income when earned (regardless of payment) and expenses when incurred (not when paid). UK Generally Accepted Accounting Practice (UK GAAP) requires accounts to be prepared under the accruals basis.

Potential benefits

• Simplicity: Cash accounting simplifies accounts preparation. Businesses won’t need to make year-end adjustments for debtors, creditors or stock.
• Real-time financial position: Cash accounting provides a real-time snapshot of your financial position, making it easier to make informed business decisions based on actual cash available.
• Tax deferral: When transitioning from the accruals basis to cash accounting, there may be a delay in tax due with debtors and stock/work in progress being excluded from taxable income.
• Cashflow management: Business owners won’t pay tax on income they haven’t yet received.
• MTD: Using cash accounting can simplify certain aspects of complying with MTD requirements.

Potential disadvantages

• Financial reporting: Accrual accounting provides a more accurate picture of financial performance as it matches income and expenses to the year they relate. Cash accounting does not account for stock, accounts receivable (debtors) or accounts payable (creditors), which provides a limited view of the overall financial position and health of the business. It may also be that a balance sheet isn’t produced as part of the annual accounts.
  
  
• Profit/capital allocation: In view of the absence of an accurate picture with cash accounting, allocating profits/capital using the cash basis is likely to be unsuitable when partners join or leave a partnership, or where there are changes in profit shares in the year.
  
  
• Inaccurate long-term profitability: Cash accounting could lead to an inaccurate representation of a business’s long-term performance and profitability, which could incorrectly influence decision-making. Similarly, assessing the value of a business using accounts prepared on the cash basis will be of limited use.

• Comparison: Analysing financial information during the transition year would be challenging because the previous years’ data would have been prepared using a different accounting method. This could impact on results which are used for mortgage renewals and pension payments. In addition, a slight change in receipts or payments timing in a period could also provide a misleading perspective of business performance.
  
  
• Access to finance: It’s likely that, at least in the short-term, some finance providers will continue to require UK Generally Accepted Accounting Practice compliant accounts i.e. accrual accounting for credit and loan assessment.
  
  
• Capital allowances: Most capital equipment payments can be treated as an expense under the cash basis, although there are some exclusions to this rule for land, buildings and cars. Capital allowances claimed under the accruals basis offer flexibility on the amount to claim. The loss of this flexibility may be detrimental for businesses which can report modest profits that are covered by personal tax allowances, or where profits fluctuate being different tax rates.

Which is right for you?

The choice between cash and accrual accounting depends on the unique needs of the business and requires careful consideration. Cash accounting will likely continue to only be of benefit to smaller businesses. In particular, there are specific issues relevant to medical practices which have been identified below. 

Please speak to your usual advisor at Larking Gowen to make sure that all relevant points have been considered and the most appropriate basis of accounting is chosen for your circumstances.

Specific issues for medical practices

• Outstanding debtors: Debtors, such as QOF, enhanced services and dispensing income would not be factored in, which would distort the financial accounts prepared on this basis.

• NHS Pension: The pension certificate follows how the accounts and tax returns are prepared. If profits are delayed to later years due to not including debtors under the cash accounting basis, the dynamisation on those earnings will be a year behind, having a negative effect on the individual’s NHS pension.
  
  
• Primary Care Network (PCN): Consideration needs to be given to what basis of accounting is used by the PCN an individual is a member of. If your practice accounts are prepared on a different basis to the PCN, it will make reconciling income from the PCN more difficult.

For more information on any of the above, please get in touch with your usual contact. You can find contact details on the Our People section of the website. Alternatively, call 033 024 0888 or email enquiry@larking-gowen.co.uk.

Stuart Swanson