Cash basis has been the standard way to work out profit for most farm sole traders and partnerships since 2024 to 2025, but many livestock farms cannot or should not use it. Here is the difference, who can use which, and what switching involves.
Cash basis records income when you are paid and costs when you pay them. Traditional accounting records them by invoice or bill date and values stock at year end. Since 6 April 2024 cash basis is the default for sole traders and partnerships, but a farming business with a current herd basis election or a farmers' averaging claim cannot use it, and neither can a limited company. Leaving cash basis can create an adjustment taxed over six tax years, so settle the choice with your accountant before the year starts. See what HMRC expects a farm to keep.
On a livestock farm that matters most at the edges of the year. Take cattle sold in March and paid for in April. Cash basis puts the sale in the year you were paid. Traditional accounting puts it in the year of the sale. A feed bill dated March and paid in May works the same way: cash basis counts it when you pay, traditional when you are billed.
Traditional accounting also brings in what the farm holds at year end, the stock in sheds, yards and fields, which cash basis ignores. It needs more records: what you are owed, what you owe, and a stock list. You must say on your Self Assessment return if you use it.
GOV.UK says traditional accounting may suit a business that is complex, holds high levels of stock or needs finance. That describes many livestock farms.
Yes. GOV.UK says that from 6 April 2024 cash basis became the default method of accounting. Before that, you needed turnover of £150,000 or less to use it, and could stay in up to £300,000. The current who can use cash basis page lists no turnover limit.
You can use it as a sole trader or a partnership without corporate partners. You cannot use it if you are:
A few other categories are shut out too. With more than one business, you choose the method for each.
To opt out, HMRC's manual says you elect for traditional accounting using the check box on the return, and that if the box is left blank, cash basis must be used. The usual trap is not knowing which box was ticked, so ask which basis your return uses.
Under cash basis you do not value stock at year end. HMRC's farmers helpsheet says the farm stock rules do not apply to farmers using the cash basis. Buying goods for resale is an allowable expense once paid, and equipment you buy to keep and use is claimed as an ordinary expense rather than through capital allowances, with cars the exception, per GOV.UK's cash basis recording page. Our guide to farm expenses and capital allowances covers the allowances side.
Under traditional accounting, stock is brought in at the lower of cost and net realisable value, as HMRC's stock valuation guidance explains. Where actual cost cannot be worked out, HMRC accepts deemed cost for home-bred stock: 60% of open market value for cattle and 75% for sheep and pigs.
Farmers rarely say work in progress. The nearest thing is animals part way through rearing, which sit inside the livestock stock figure. Crops in the ground, and breeding stock bought under cash basis, are accountant questions. Our guide to herd basis and stock valuation goes further.
They do not mix. HMRC's helpsheet says you cannot claim averaging if you have used the cash basis, and you cannot elect for the herd basis if you have used the cash basis. From the other side, the cash basis rules bar a farming business with a current herd basis election, or a farming business with a fluctuating profit averaging claim.
The practical point is that averaging and the herd basis both need traditional accounting. If your profits swing and averaging might help, cash basis is the wrong tool for those years. Stock matters here too: a higher closing stock valuation lifts that year's profit and can change whether the 75% test is met. See how farmers' averaging works.
Whether a past cash basis year affects a later claim is a question for your accountant, because the helpsheet wording is short and farms differ.
Making Tax Digital adds a wrinkle: farmers who claimed averaging on the SA103 page in 2024 to 2025 are exempt for 2026 to 2027, a pause rather than an escape. See our Making Tax Digital sign-up guide.
Leaving cash basis means electing for traditional accounting on the return, then making a one-off adjustment so that income is taxed once and costs relieved once. HMRC's manual sets the sum out in two steps. Add what customers owed you at the end of the last cash basis period to the stock held, valued at what you paid for it. Then take off what you owed suppliers and any income received for work not yet done.
If the result is positive, it is adjustment income and is spread for tax over six tax years, one sixth starting in the first period after leaving. You can elect to accelerate the charge. If it is negative, it is deducted in full in the first period.
An illustration, not advice. Say customers owe you £60,000, stock cost £90,000 and you owe suppliers £40,000. The adjustment is £110,000, taxed at about £18,333 a year over six years. A full yard can produce a large figure, so plan the switch.
Moving into cash basis has its own adjustments too. Do not move either way without your accountant running the numbers.
In the books, cash basis is bank-led: record each payment in and out. You can record income and expenses including or excluding VAT, but you must treat both the same way. Traditional accounting needs sales invoices, supplier bills, a list of debtors and creditors, and a year-end stock list. Our guide to farm bookkeeping and HMRC records covers what to keep.
In tax, cash basis profit moves with payment dates. A buyer who pays late, or a bill you pay early in March, shifts profit between years. Traditional accounting follows the sale and the bill, with stock smoothing the result.
Making Tax Digital asks for category totals under either basis, so the choice does not decide whether you are in. The Making Tax Digital thresholds guide covers that.
Keep the stock lists behind each year's accounts.
My advice is to start from the exclusions. With a herd basis election, an averaging claim or a company, the choice is made for you. Otherwise, cash basis suits a farm with little stock movement, tidy bank records and no wish to average. Traditional accounting suits large closing stock, a lender asking for it, or profits that swing enough to make averaging worth having.
Decide before the year starts, not when the return is due. Leaving it late is how a stock list gets rebuilt from memory. HMRC also expects you to tell it if you change your stock valuation basis.
This is general information, not tax advice. Your accountant should confirm your position. FarmHQ is a farm office app for UK cattle and sheep farms, in beta, where Ask Farmer Joe drafts and you confirm. It holds your invoices, bills and stock numbers in one place for your accountant. See FarmHQ pricing.
Yes, for sole traders and partnerships without corporate partners, from 6 April 2024. But a farming business with a current herd basis election or a farmers' averaging claim cannot use it, and limited companies cannot either. To use traditional accounting you elect for it on your Self Assessment return.
No. HMRC's farmers helpsheet says you cannot claim averaging if you have used the cash basis to calculate your profits. You need traditional accounting, which counts money owed, money owing and closing stock. Ask your accountant how a past cash basis year affects a claim.
No. Cash basis farmers do not apply the farm stock valuation rules, because income and costs are recorded when money is paid or received. Under traditional accounting you must value livestock and crops at year end, at the lower of cost and net realisable value.
You make an adjustment: what customers owe you plus the paid cost of stock, less what you owe suppliers and income received in advance. A positive result is taxed over six tax years, one sixth a year, unless you elect to accelerate it. A negative result is deducted in the first year.
Not in the current eligibility rules. Before 2024 to 2025 you needed turnover of £150,000 or less, and could stay in up to £300,000. GOV.UK's who can use cash basis page now lists exclusions by type of business, not by turnover.