Expenses under Traditional/Cash Basis accounting

[DannyNight]

I've just moved to the cash-basis system for the 2020/21 tax year going forward. For when I was under traditional accounting, I've noticed that under logging expenses that I have to spread the cost of prepayments over the accounting period that it affects. Does this include things like website and domain renewals? I counted the full amount that I paid for each year as it was invoiced and paid at the same time. Is this wrong and if I am, how do I fix this?

[Lambs]

D,

Cash accounting means that you recognise only amounts paid and received, and no longer adjust for things like Debtors, prepayments or accruals.

In the period/year in which you move from traditional accruals-based accounting to the cash basis, you should adjust to make sure that things are not double--counted, but also ensure that things are claimed that might otherwise be missed.

For example:

You raised a sales invoice last year under traditional accounting so it was recognised as sales in that year; you received the cash in this the first cash-accounting year, so ordinarily you would recognise it again, but you do NOT because it is a transitional adjustment.

You renewed your website last year but claimed only 6 months of the cost because half of the outlay was "prepaid" and related to the current year. Under cash accounting, the 'old' payment does not exist (although you will claim the current year's payment in full) so you are allowed under the transitional rules also to claim for the "missing" unclaimed 6 months left over from last year. This will mean you get 18 months' worth of cost in this first 12-month period under cash accounting, but this is permitted under the cash-accounting rules.

Conversely, if you accrued last year for a payment obligation - purchases, professional fees, repairs or similar - for which you had not actually paid at the end of that year but are physically paying it this year under cash accounting then, unsurprisingly, you are not allowed to claim a deduction twice.

I trust this makes sense.

With regards,

Lambs

[DannyNight]

Thanks for the detailed answer. I understand the transitional rules for accounting systems. But I was never told about the idea of spreading prepayments under traditional accounting, even when I had an accountant in my first year as self-employed. I was told that if it was invoiced or charged that tax year, I was supposed to declare everything that year. I have done this for a few years now with my website/domain subscriptions. Do I have to write to HMRC to change my old tax returns as it's too late to change them via online or as I've already claimed all of this, I shouldn't worry about it?