The cash and accruals bases are ways to tell HMRC how much money you've got coming in and going out. When you're self-employed, you can often choose which method works best for you. Depending on your situation, you may be able to switch between the two as things change.
Accounting Options
The accruals basis, sometime known as the Generally Accepted Accounting Principles (GAAP), can be slightly confusing at first. You record the money coming in when you raise your invoices, even if you don't actually get paid until later. When you pay money out, you generally can't declare it as an expense until the thing you bought is actually used. Just buying in some stock, for example, doesn't automatically count as an expense. When you sell the stock, however, its original cost to you is counted as an expense of the sale. Until you actually sell it, it's just counted as an asset of your business.
There's a lot more to it, of course, which is why a lot of smaller businesses prefer the simpler cash basis.
Accounting Options
Using the cash basis, you count your money when it comes in and your costs when they go out. With a couple of fiddly exceptions, you don't have to worry about messy things like stock assets and capital expenses.
You still have to be consistent in your bookkeeping, of course. You may have to make decisions about when to record your income and expenses. For instance, if someone pays you by cheque, do you count the money when the cheque arrives or when it clears? There aren't really any strict rules about this, as long as you stick by your decision.
Self Assessment EnquiryGenerally, the cash basis only requires the kind of record-keeping you should already be doing. Keeping track of your sales, expenses and stock are all part of running a good business. The system's still quite a lot simpler and easier to get your head around, though.
Usually, the things you buy for your business will just count as normal expenses. Just record what you spend and when you spend it. You won't normally have to bother with the tricky rules around capital allowances unless you're buying things like cars or motorcycles.
Interest on bank loans or other finance costs are allowed as expenses up to £500. If you're going to be paying more than that, then you might be better off looking into the accruals basis. As always, get advice from RIFT to find out what your best move is.
If you've made a loss in a tax year, you can generally use it to count against your future business profits. This is called "carrying the loss forward". It's a good way of making sure you aren't punished for having a good year following a bad one. It doesn't work the other way round, though. You can't claim a reduction on last year's taxes just because you made a loss this year.
As long as you're under the cash basis entry threshold, you can still use it even if you're VAT registered. The threshold is the same as the one used for VAT, which is £83,000 in sales or turnover for 2016/17. If you go over the exit threshold later (£166,000 as of £2016/17), you'll have to leave the cash basis the following year.
If you're running more than one business, using the cash basis for one of them means using it for all of them. At this point, all your business' turnovers are added up to see if you hit the entry and exit thresholds.
There are a few reasons why you may not be able to use the cash basis. For one thing, you may be making too much money. If you make more than the entry threshold (£83,000 as of 2016/17), then you have to use the accruals basis. If you used to qualify but now make more than the exit threshold (£166,000 in 2016/17), you'll also have to switch to the accruals basis. Remember that all your business' turnovers are added together to work this out.
If you're in a Partnership and one of the Partners is not an individual person, you might not qualify for the cash basis. You also can't use it if you're using profit averaging.
Another thing to keep in mind is that you have to actually choose to use the cash basis. That means ticking the box for it on your Self Assessment tax return. This is really important; the taxman will automatically assume you're using the accruals basis if you don't tick that box!
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