Accruals Basis Accounting, Cash Basis Accounting, Simplified Accounting

 

From April 2024 Cash Basis Accounting for Income Tax is standard for Unincorporated Businesses, with an opt out back to Accruals Accounting.

Cash Basis is known to many businesses from VAT, but its application to Income Tax differs.

In this brief we talk about Cash Accounting for VAT, Cash Basis Accounting for Income Tax and Simplified Accounting for Income Tax.

 

Cash v Accruals Accounting – VAT

Cash Accounting means transactions are reported for VAT according to the date they are paid or received.

Accruals Accounting, also known as Invoice Accounting, for VAT means transactions are reported by reference to the date of the invoice.  This is the default for VAT accounting.

For VAT registered yoga businesses Cash Accounting is simpler, more logical, and normally not detrimental.   However if you have a large number of suppliers who you deal with on an account basis and pay later on, eg 30 or 60 days, then accruals accounting may slightly advance your VAT Input Tax claims – unlikely to be a concern for most yoga businesses.

You are eligible to join cash accounting for VAT if your turnover is less than £1.35m.

If you use the Flat Rate Scheme then you will automatically be using a form Cash Accounting.

HMRC Guidance on Cash Accounting

 

Cash Basis v Accruals Basis Accounting – Income Tax

Cash Basis Accounting means transactions are reported for tax according to the date they are paid or received.

Accruals Basis Accounting for Income Tax means transactions are matched to the period they relate to, eg:

• Income is reported when earned rather than received
• Expenses are reported against the period the income is earned in, rather than when paid

From April 2024 Cash Basis becomes the default for Unincorporated Businesses (Sole Traders and Partnerships) although they will be able to elect into Accruals Accounting.

Circumstances when you may wish to elect into Accruals Basis:

• You’ve received monies in advance, eg for a retreat or training, and you won’t incur costs until a later tax year – Accruals Basis allows you to match income and expense
• If you have monies owing to you, eg from corporate customers, and you are concerned to maximise profits, eg for a mortgage
• These circumstances are likely to be uncommon for Yoga Teachers, so in most instances there is no merit in electing into Accruals Basis.

Lets look at an example:

Pat’s business year end is 5 April annually in line with tax year.  She is running a retreat in June 2026 and:

• • • She receives deposits from guests of £1,000 in March 2025
    • She receives balances from guests of £4,000 in May 2026
    • She pays a deposit for the venue of £2,000 in June 2025
    • She pays the balance for the venue of £1,000 in April 2026

Under Accruals Basis Accounting this is all reported in 2026/27 – Income of £5,000 and expense of £3,000

Under Cash Basis Accounting, she reports:

• • • 2024/25 Income £1,000
    • 2025/26 Expense £2,000
    • 2026/27 Income £4,000 Expense £1,000

Cash Basis Accounting means some income is taxed earlier, and some expenses are relieved earlier.  Income and expenses are split over three years.

A few points to note:

• For most small yoga businesses, which tend to be quite simple and not buy or sell on credit, Cash Basis Accounting tends to happen automatically – especially if your business is class teaching based, so you are not taking deposits.
• For businesses who take or make deposits, eg for retreats, or buy or sell on credit, Accruals Basis Accounting tends to be preferred as it makes sure transactions are matched.
• You do not have to use the same accounting basis for VAT and Income Tax.

HMRC guidance on Cash Basis

 

Corporation Tax

Companies are not allowed to use cash accounting, and must account on an accruals basis.

 

Simplified Accounting

Simplified Accounting is an HMRC scheme to simplify some expenses for small businesses under Self Assessment for Income Tax.

It covers:

• Vehicle Costs
• Working from Home Costs
• Expenses if you live on your business premises (eg a flat over a studio)

HMRCs guidance is here, and our guidance on Car Costs and Working From Home / Home As Office Expenses reflect the Simplified Accounting guidance.

Our advice is to use the simplifications where appropriate.