Put simply, cash basis accounting is a straightforward way of working out the tax you pay through self assessment based on income and expenses received.
It means that you pay tax on what you have actually received, excluding debtors invoiced and work in progress.
By using the cash basis you will not need to calculate your debtors and creditors at the year-end, nor estimate accruals and prepayments. Barristers have a concession to use the cash basis for their first 7 years.
Under the “new rules” (effective 2017/18) all taxpayers are entitled to adopt the cash basis of accounting if their turnover is less than £150,000 but must leave the scheme when turnover exceeds £300,000. High earning Barristers on maternity leave may have a window to change schemes.
By the end of the 7th year of practice, Barristers must move from cash basis accounting to earning basis and include debtors and work in progress in their accounts, unless they are eligible to, and choose to, adopt the “new rules”.
Complications with cash basis accounting for Barristers:
- After 7 years at the bar debtors and work in progress must be introduced into the accounts
- Debtors at the commencement of the 7th year can be spread over 10 years
- Work in progress can be spread over 3 years (sometimes 6 years)
Planning point – Invoice all work in progress at the end of the 7th year in order to spread the tax payment over a longer period.
- Conditional Fee Arrangement (CFA) work can be a real problem to assess exactly when such a fee becomes taxable, for instance:
- When is the condition satisfied?
- When is a barrister “reasonably certain” to earn their fee?
Although the cash basis was first introduced for small businesses and sole traders in 2013 to simplify self assessments and tax returns, for Barristers it is not quite as straightforward. It is important to get specialist advice to ensure that you are within the rules and planning your tax effectively.
For more detailed information, refer to the latest Taxation and retirement benefits guidance from the Bar Council and download our helpful guide to Barrister accounts and taxation.
Need an expert to guide you through cash basis accounting and potential complications arising for Barristers?
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