MTD and Cash Basis Accounting: Can You Still Use It

One of the most common questions about MTD is whether sole traders can continue using cash basis accounting. The short answer is yes — MTD does not change your choice of accounting method. But understanding how cash basis works within MTD is important for getting your quarterly updates right.

What Is Cash Basis Accounting?

Cash basis is the simplest way to account for your business income and expenses. You record:

• Income when you receive the money (not when you invoice for it)
• Expenses when you pay for them (not when you receive the bill)

This is the default accounting method for sole traders and partnerships with a turnover under £150,000. Most self-employed people use it because it is straightforward and matches how they think about their money.

The alternative is accruals basis (also called traditional accounting), where you record income when you earn it and expenses when you incur them, regardless of when money changes hands.

Cash Basis and MTD: How It Works

Under MTD, your quarterly updates reflect your chosen accounting method. If you use cash basis:

• Your Q1 income figure includes all money received between 6 April and 5 July — not invoices raised during that period
• Your Q1 expense figure includes all payments made between 6 April and 5 July — not bills received during that period

This makes quarterly reporting more straightforward on cash basis, because you are simply looking at money in and money out for each quarter.

Advantages of Cash Basis Under MTD

Simplicity. You do not need to track outstanding invoices or unpaid bills for each quarterly update. If the money has not moved, it does not appear.

Matches bank statements. Your quarterly figures should closely align with your bank account activity for the period, which makes review and verification easier.

No need to track debtors and creditors. Under accruals basis, you would need to account for money owed to you and money you owe. Cash basis avoids this complexity.

Tax timing benefit. If a customer pays you in April rather than March, that income falls into the next tax year under cash basis. This can occasionally work in your favour for tax timing.

Limitations of Cash Basis

Cash basis does have some restrictions:

• You cannot claim capital allowances in the traditional sense (though you can claim for most purchases as a deduction when paid, except for cars)
• You cannot deduct losses against other income — losses can only be carried forward against future profits from the same business
• The turnover threshold is £150,000 — above this, you must use accruals basis
• Interest deductions are limited to £500 per year on cash basis

For most sole traders with straightforward businesses, these limitations do not matter. But if you have significant capital expenditure or losses, discuss with your accountant whether accruals basis is better for you.

How to Tell Your Software Which Method You Use

When setting up your MTD software, you will be asked to choose your accounting method. Select "cash basis" and the software will handle everything accordingly.

In Accounted, this is a one-time setting during setup. All quarterly updates and your final declaration will be prepared on the basis you choose.

Can You Switch Between Methods?

Yes, you can switch from cash basis to accruals basis (or vice versa), but you need to make adjustments when you switch to avoid income or expenses being counted twice or missed entirely.

Switching is usually done at the start of a new tax year, not mid-year. If you are considering a switch, talk to your accountant about the transitional adjustments needed.

Our Recommendation

If you are a sole trader with turnover under £150,000 and a relatively straightforward business, cash basis is usually the right choice. It is simpler, easier to manage, and works naturally with MTD quarterly reporting.

If your business is more complex — significant stock, large capital expenditure, or you regularly make losses — consider whether accruals basis offers advantages.

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