Do you have a combined annual turnover of less than £150,000 and are a sole trader or in a partnership? Then you can use cash basis accounting, rather than traditional accounting.
With traditional accounting, you pay tax and claim expenses based on the invoice or billing date.
If you choose to use cash basis accounting, you pay tax and claim expenses based on when the money leaves or enters your account.
Why would this matter? Well, if you’re getting paid for work on a monthly basis, there’s probably very little difference. But, if you agree to and invoice someone for work several months before you get paid, it can change the year you pay tax on that income.
For example, if you use traditional accounting and invoice someone in March 2020, but don’t get paid until July 2020. You have to declare this income on your 2019/20 tax return and pay the tax on it by January 2021.
If you use cash basis, you would have to declare this income in the tax year you got paid, which is 2020/21. This means you wouldn’t pay tax on this until January 2022.
However, there are some downsides to cash basis accounting. For example, you can’t offset losses against your taxable income, or claim for more than £500 in interest costs. So you might want to get advice about what’s best for you and your business.