N ow that the 2024/25 tax year has ended, thoughts inevitably turn to the completion of business accounts and tax returns. So, with this in mind, Chris George, Tax Partner looks at a potentially significant change in the rules which, to date has received little publicity the change to cash-based accounting. From 6 April 2024, the default method of accounting for unincorporated businesses moved to the cash basis. Previously, all businesses were required to prepare accounts under the accruals basis, meaning that all income and expenses incurred in the accounting period were included, regardless of whether they were paid/received or not. This change is driven by the move to Making Tax Digital and trying to simplify administration for businesses. But, as with the vast majority of HMRC simplification initiatives, they often result in some complexities, particularly in the transitional period from one basis to another. This is certainly the case with the change to cash basis accounting - with a large number of transitional adjustments potentially needed. Given the unique nature of businesses within the agricultural sector, some of the transitional adjustments could have a significant impact on a business’ taxable profits. Stock One key difference between the two methods of accounting is the concept of opening and closing stock. Within ‘traditional’ accrual accounting, closing stock is valued at the end of the accounting period and is removed from the costs of sales expenses incurred in the year. This is then brought into account in the following year as opening stock.
Therefore, in the transitional year, there will be an increased cost of sales deduction, reducing taxable profits. And on a sizeable arable enterprise, this additional stock deduction could be substantial. Fixed assets With accrual accounting, fixed assets are included on the business’ balance sheet and depreciated, and capital allowances are given for tax purposes. In cash basis accounting, tax qualifying fixed assets are allowed as a deduction in the period in which they are paid for. If, on the transition to cash basis, a business has an unrelieved Capital Allowance pool brought forward, the full amount of this balance is allowed as a deduction in the transitional year. This doesn’t however apply to Capital Allowance pools containing cars. These continue to be dealt with in the usual way. Hire purchase With assets acquired on hire purchase or similar credit arrangements, under ‘traditional’ accounting, Capital Allowances are generally given on the full cost of the asset as soon as it is brought into use. Under cash basis, tax relief is only obtained on payments actually made in each accounting period. So, if the business has assets which are still under HP agreements during the transitional period, the amount outstanding under the agreement is brought into charge as an income element, potentially increasing the businesses taxable profits. Timing of sales and purchases As mentioned above, under accrual accounting income and expenditure relating to an accounting period are included regardless of if they have been actually paid or received. As the name implies, cash accounting only includes income received and expenses actually incurred in the period.
This provides the opportunity for tax planning by delaying sales until after the end of the accounting period and paying for expenses up front. This will of course have an impact on a business’ cash flow, but if planned correctly could produce some sizeable reductions in taxable profits in certain periods. Are all businesses affected? There are some types of business that are excluded from the default cash basis accounting. LLP’s and limited companies as well as those businesses who wish to make an averaging claim or have a herd basis election in place will continue on an accruals basis. Additionally any businesses that qualify for cash accounting can opt out and retain the accruals basis if they wish to.
One final point with the change to cash accounting is how banks and finance
organisations will adjust to accounts drawn up in this way. For complex businesses like those in the agricultural sector, cash basis accounts may look markedly different to traditional ones. Banks may still require accounts drawn up under the accruals basis and cash accounting might mean that certain debt covenants are not met, so these factors will need careful consideration. On the face of the matter, these changes can, in some cases, present a significant opportunity to produce a one-off reduction in taxable profits. This could be advantageous if the business owners have a significant one-off source of income or a capital gain in one year.
This change does however come with complexities especially to agricultural
businesses so careful consideration needs to be given as to when the right time is to move from one basis to another. As always, the key to maximising tax planning opportunities is to engage specialists with experience in these issues as early as possible. To speak to Chris or one of the Agricultural team call us on 0330 058 6559 or email hello@scruttonbland.co.uk
With cash basis accounting, no closing stock adjustment is required.
So, in a transitional year of cash basis accounting, a business will have an additional deduction for opening stock brought forward - but will have no corresponding closing stock adjustment.
AGRICULTURE AND FARMING | SCRUTTON BLAND | 1 1
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