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How to make the cash basis move work for your clients

5th Jun 2024
Brought to you by
coconut logo
Coconut’s simple bookkeeping and tax app is specifically designed for sole traders, helping them...
Save content
Have you found this content useful? Use the button above to save it to your profile.

It’s official – according to HMRC cash really is king. With the shift by the UK government to make the cash basis the default accounting method for smaller self-employed individuals, firms now have to face the task of preparing their smallest clients for yet more change.

This change, introduced in the Autumn Statement 2023, is aimed at simplifying the tax process for sole traders and partnerships. However, as with every edict from HMRC, this transition requires  accountants to plan strategically  to maximise the benefits and avoid potential pitfalls. Here, we will explore the rationale behind this move and how Coconut can help your clients navigate this new landscape cash-first effectively.

A quick refresher on the Cash Basis

Under the cash basis, income and expenses are recorded when they are actually received and paid, rather than when they are invoiced.

This is a common default for small businesses, since it simplifies bookkeeping by eliminating the need for accruals, prepayments, and other complex adjustments. It also aligns the recognition of income and expenses with the actual cash flow, which can be particularly beneficial for inexperienced entrepreneurs who want to keep things as easy as possible and not mess around with too many formulas.

Benefits of the Cash Basis

  1. Simplicity: The cash basis is the simplest option, making it easier for small business owners to manage their finances without needing in-depth accounting knowledge​​​​.
  2. Straightforward Cash Flow Management: By deferring the recognition of income until payment is received, businesses can delay tax liabilities, potentially improving cash flow​​.
  3. Alignment with MTD Requirements: The shift to the cash basis facilitates compliance with Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA), as it simplifies the process of turning bank statements into quarterly reports required by HMRC​​​​.

What to watch out for

Despite its advantages, the cash basis is not without challenges, as accountants well know. For some businesses, particularly those with high levels of stock or significant credit transactions, the cash basis can cause fluctuating profit margins and inconsistent tax liabilities​​.

  1. Manipulation of Income and Expenses: There is a risk of businesses manipulating the timing of income and expenses to manage their tax liabilities. For instance, delaying invoicing or prepaying expenses to defer tax​​.
  2. Inconsistent Tax Bills: The cash basis can lead to significant variations in taxable profits from year to year, making budgeting and financial planning more challenging​​.
  3. Unsuitability for Complex Businesses: Businesses with high stock levels or significant interest expenses might find the cash basis less beneficial. The cash basis limits the deduction of interest expenses and does not handle stock valuations as effectively as the accruals basis​​.

Making the cash basis work for you

Smoothing out the transition requires systems  that work with you, not against you. Coconut is a comprehensive accounting and tax app designed for sole traders, built to work on the cash basis from day one. For firms looking to use the shift to cash to bring clients into a consistent, efficient process, Coconut is ready to support you at every stage.

  1. Real-Time Bookkeeping: Coconut automates the recording of income and expenses as transactions occur, ensuring that records are always up to date, aligning with straightforward, cash basis bookkeeping .
  2. Tax Estimation and Planning: Our app provides tools to estimate tax liabilities based on current transactions, helping users set aside the appropriate amount for tax bills, preventing any nasty surprises and simplifying financial planning​.
  3. Seamless Integration with Accountants: Coconut allows users to share their financial data with their accountants in real time, facilitating seamless collaboration and efficient tax preparation​.

How to incentivise the right behaviours

For time-strapped small business owners and one-person bands, promoting any change can be an uphill battle. The key for streamlining the change is to make any extra effort in the clients’ interest, rather than just another regulator-mandated tickbox. When emphasising the benefits of moving to a digital, cash-basis process, emphasise:

  1. Embracing Real-Time Tracking: Encourage clients to use Coconut’s real-time tracking features to ensure all transactions are recorded as they occur, helping them understand their outgoings on a more regular basis and a real-time view of their available cash to make smarter decisions.
  2. Easier Advisor Integration: Regularly review income and expenses with clients to ensure they are maximising allowable deductions and optimising their tax positions. Coconut’s categorisation tools can aid in identifying deductible expenses​, helping unlock working capital.
  3. Educate on Timing Strategies: While the cash basis can lead to tax planning opportunities, it’s important to advise clients on the ethical implications and potential risks of manipulating transaction timings, helping them find more value in the change.

Embracing the cash basis future

While we can’t deny that the move to make the cash basis the default accounting method for smaller self-employed clients is a significant change, it’s important to see the big picture in how it can drive value for firms and clients.

By implementing tools like Coconut, accountants can help their clients navigate this transition smoothly, ensuring they benefit from the simplicity of the cash basis while maintaining accurate and compliant financial records that benefit their business directly.

To learn more, start your free trial today or book a demo with a member of our team.