Cash Basis vs Accruals for MTD: Which Should You Use?

When you set up for Making Tax Digital, one early decision shapes every figure you file: which accounting basis you use. For most people it's already been made for you — but it's worth understanding, because it changes what goes in each quarterly update.

The two methods in one line each

• Cash basis — record income when the money arrives, and expenses when you pay them.
• Accruals basis (also called traditional accounting) — record income when it's earned and expenses when they're incurred, regardless of when the cash actually moves.

A quick example

Say you invoice a customer £5,000 on 20 March, and they pay on 10 April (a new tax year).

• Under cash basis, that £5,000 is income in the new year — when the money landed.
• Under accruals, it's income in the old year — when you earned it by doing the work.

Same £5,000, different year, purely because of the basis. Multiply that across a whole business and you can see why the choice matters.

Cash basis is now the default

This is the key change most people need to know:

From 2024/25, cash basis became the default for most sole traders and unincorporated landlords.

That means if you do nothing, cash basis applies. You can still choose accruals by opting out — but the starting point flipped. HMRC made cash basis the default precisely because it's simpler and lines up with your bank statements, which suits MTD's quarterly rhythm.

Pros and cons

Cash basis — good for:

• Simplicity — it follows your bank, so it's easy to reconcile.
• Cash flow — you're taxed on money you've actually received, not on invoices still unpaid.
• Most service businesses and landlords with straightforward income.

Cash basis — watch out if:

• You carry significant stock, or
• You want the most precise profit picture for the period.

Accruals — good for:

• Businesses that hold inventory, invoice on long payment terms, or want profit matched to the period the work relates to.
• Anyone who needs accounts on a traditional basis for other purposes (e.g. borrowing).

What it means for your quarterly updates

The fields in a quarterly update are the same either way — turnover, other income, expenses. What differs is which transactions you include:

• Cash basis: income received and expenses paid in the period to date.
• Accruals: income earned and expenses incurred in the period to date.

The golden rule: pick one basis and use it consistently across all four quarters and the final declaration. Mixing them mid-year makes your cumulative figures meaningless.

Switching basis

You can change basis, but not on a whim:

• You choose a basis for the tax year, not quarter by quarter.
• Switching triggers transitional adjustments so that income isn't double-counted or dropped in the changeover year.
• It's a good moment to involve your accountant, who can handle the adjustment cleanly.

Which should you choose?

For a lot of sole traders and landlords, the default cash basis is the right answer: simple, cash-flow-friendly, and a natural fit for filing from your bank each quarter. Choose accruals when your business genuinely needs the more precise matching — stock, long invoicing terms, or accounts you rely on elsewhere. When it's a close call, ask your accountant.

However you account, ThisQuarter lets you enter or import your figures and file each quarter to HMRC, keeping the same basis consistent across the year. See how it works.

The bottom line

Cash basis follows the money and is now the default; accruals follows the underlying transactions and suits more complex businesses. Whichever you use, apply it consistently — that consistency is what keeps your cumulative quarterly figures honest.