Cash basis vs traditional accounting: which one you're already on

There are two ways to decide which tax year a transaction belongs to. Since April 2024 the simpler one is the default for sole traders and most landlords — you now have to opt out, not in.

The difference in one line

Invoice a client on 2 April 2027 and get paid on 20 April. Under cash basis that's income in 2027/28. Under traditional accounting it lands in 2026/27 — a year earlier, and taxed a year sooner.

Why cash basis is the sensible default

• You don't pay tax on money you haven't received. The single biggest advantage, and it matters most when clients pay late.
• Your bank statement is your accounting record. No debtors ledger, no accruals, no year-end adjustments — which is exactly why it suits MTD's quarterly rhythm.
• Nothing to reconcile. What went through the account is what goes on the return.

For a landlord with two properties or a sole trader invoicing a handful of clients, cash basis is almost always the right answer. It is also what MTDFox assumes.

When traditional accounting is the better choice

• You carry significant stock. Cash basis takes no account of unsold inventory, which can distort profit badly in a trading business.
• You're seeking finance. Lenders often want accounts prepared on the traditional basis.
• Your business is genuinely complex — multiple entities, long project cycles, work in progress.

Limited companies cannot use cash basis at all. Neither can partnerships that have a company as a partner.

Switching between the two

You choose on your tax return each year, so you're not locked in. But you cannot double-count or drop a transaction in the changeover: an invoice already taxed under the old basis must not be taxed again under the new one. Switching in a year with large unpaid invoices is the case worth taking advice on.

Landlords: it's the default for you too

Property businesses use cash basis by default unless rental income exceeds £150,000, or you elect otherwise. It combines with the rest of the landlord rules exactly as you'd expect — and note that mortgage interest is still not an expense on either basis. Section 24 is a separate restriction, and it applies whichever way you count.

The practical takeaway

If you're reading this to decide, you almost certainly want cash basis: it's the default, it's simpler, and it matches how MTD wants you to keep records anyway. Choose traditional accounting only when you have a specific reason — stock, lending, or an accountant who has told you to.

Related: what landlords can actually claim and MTD for sole traders.