Cash Basis vs Accruals Under MTD: Which Should Landlords and Sole Traders Use?

Cash basis or accruals? For most UK sole traders and landlords, this question has become more important with the arrival of Making Tax Digital for Income Tax. The method you use affects not only when income and expenses appear in your accounts, but also how easily your digital records flow into your quarterly updates — and how smoothly you can close out each tax year through the new final declaration.

Since April 2024, cash basis has been the default for most small businesses and for landlords with gross property income up to £150,000. But default does not mean mandatory: you can opt out and use traditional accruals accounting if that better suits your business. The choice matters, both for tax and for admin.

This post walks through what each method means, how they interact with MTD, and who should be using which. It also covers the practical implications for quarterly reporting — because the method you choose determines what "the transaction date" actually means for each entry in your digital records.

What is cash basis?

Cash basis is the simpler of the two methods. Under cash basis, you record income when the money actually lands in your bank account (or your till, or your hand), and you record expenses when you actually pay them. There is no adjustment for invoices you have sent but not been paid for, or for bills you have received but not yet settled.

A sole trader who invoices a customer £2,000 on 20 March but is not paid until 15 April records the £2,000 as income in the tax year starting 6 April, not the one ending on 5 April. The date of receipt is what matters, not the date of the invoice.

For landlords, cash basis means you record rent when it is received, and expenses (including mortgage interest, repairs, insurance, agent's fees) when you pay them. Rent that is due but late does not appear in your accounts until it actually arrives.

What is accruals accounting?

Accruals accounting — sometimes called traditional accounting — records income when it is earned and expenses when they are incurred, regardless of when the money actually moves. Under accruals, the £2,000 invoice above would be recorded as income on 20 March (when the work was completed and the invoice raised), even though the payment did not arrive until after the tax year ended.

Accruals accounting is more accurate in the sense that it matches income to the period it was actually earned in, and expenses to the period they relate to. But it requires additional adjustments at year-end for things like accrued income, accrued expenses, prepayments, and accounts receivable.

The default rules

From April 2024, cash basis is the default for most unincorporated businesses and small landlords. Specifically:

• Sole traders and partnerships (other than those with corporate partners) — cash basis is the default.
• Landlords with gross property income up to £150,000 — cash basis is the default.

You are opted in to cash basis automatically unless you choose otherwise. To use accruals accounting, you must make a positive election to opt out.

Some businesses must use accruals regardless of size — notably limited companies, LLPs, and partnerships with corporate members. These are outside the cash basis rules.

Why the default matters

The shift to cash basis as the default was deliberate. HMRC and the Treasury saw that most very small businesses and small landlords were effectively managing their books on a cash basis anyway — recording what hit the bank, not what was technically "earned" in a particular period. Making cash basis the default aligns the rules with real-world practice.

For MTD, cash basis fits particularly neatly. Quarterly updates require you to report transactions within specific time windows, and cash basis gives you an objective, easily-verifiable date for every entry: the date the money moved. No judgement calls about when work was "substantially complete" or when income was "earned".

Accruals accounting, by contrast, requires you to make more judgement-based decisions every quarter. When was the invoice earned? When does the expense relate to? Are there prepayments to spread? This is more work, and it multiplies the scope for disagreement between different bookkeepers looking at the same data.

When might you opt out of cash basis?

Despite its simplicity, cash basis is not always the best choice. Reasons you might opt out and use accruals instead:

• You have significant levels of stock or work-in-progress. Cash basis does not account for stock in the traditional way, which can be misleading if you carry significant inventory.
• You use long-term contracts. If you bill over months or years, accruals give a more accurate picture of how your business is performing at any given point.
• You have losses you want to carry back. Cash basis has some restrictions on loss relief that accruals accounting does not have.
• Your accountant prepares management accounts. If you want monthly P&L and balance sheet reporting that matches your annual tax accounts, accruals is more consistent.
• You are planning to grow above the cash basis threshold. If you expect to exceed the relevant limits soon, staying on accruals avoids a disruptive switch later.

For most small landlords and simple sole traders, cash basis is easier and generally produces a similar tax outcome over the long run. But for more complex businesses, accruals is often worth the extra effort.

How to opt out

Opting out of cash basis is done through your Self Assessment return. You make an election for the tax year in which you want to use accruals, and that election remains in force until you change it again.

You cannot use cash basis for some sources and accruals for others within the same trade. If you have multiple trades, you can choose different methods for each — but within a single trade, it is one method for everything.

Cash basis under MTD: what gets reported

Under cash basis in MTD, your quarterly updates report transactions based on when they actually happened (money in, money out). The date you attach to each digital record is the transaction date — the day the rent was paid, the day the invoice was settled, the day the repair was done and paid for.

This makes quarterly reconciliation with bank statements straightforward: if a transaction is in your bank feed for the quarter, it should also be in your MTD records for that quarter. Any differences highlight either missed transactions, wrongly categorised items, or timing mismatches at the boundaries of quarters.

Accruals under MTD: what gets reported

Under accruals in MTD, your quarterly updates report transactions based on when they were earned or incurred. The date you attach is the invoice date (for sales) or the bill date (for purchases), even if the money has not yet moved.

This requires more sophisticated bookkeeping. Your MTD software needs to track invoices as separate items from their eventual payments. Quarterly updates will not reconcile simply to the bank statement, because you are recognising income and expenses that have not yet resulted in cash movement.

For most accruals users, this is familiar territory — anyone who has run a small business with proper accounts will be used to this. But it is more work, and it requires software that properly handles the distinction between "invoiced" and "paid".

Cash basis quirks for landlords

Landlords using cash basis should be aware of some specific points:

• Rent received in advance. If a tenant pays rent ahead of the period it covers (for example, paying January's rent in early December), cash basis records it in December — not in January.
• Mortgage interest. Under cash basis for landlords, mortgage interest is recorded when paid. This aligns with the cash flow out of your bank account.
• Capital vs revenue. Cash basis does not change the fundamental distinction between capital and revenue expenses. A new roof is still capital and not immediately deductible; routine repairs are still revenue. What cash basis does is simplify the timing of the deductions that are available.
• The £150,000 threshold. Cash basis for landlords is available if your gross property income is £150,000 or less. Above that, accruals is required.

A worked comparison

To make the difference concrete, consider a sole trader who:

• Invoices £12,000 on 25 March (tax year 2026/27).
• Is paid £12,000 on 5 May (tax year 2027/28).
• Pays a £400 tax adviser bill on 2 April (tax year 2026/27).
• Receives a £200 utility bill dated 28 March but not paid until 20 April.

Under cash basis, the tax-year position is:

Tax Year	Income	Expenses	Profit
2026/27	£0	£400	-£400
2027/28	£12,000	£200	£11,800

Under accruals, the position is:

Tax Year	Income	Expenses	Profit
2026/27	£12,000	£600	£11,400
2027/28	£0	£0	£0

Over the two years, the total profit is the same (£11,400). But the timing — and therefore the tax payments in each year — is very different. For MTD quarterly reporting, the difference is even more pronounced, because transactions appear in different quarters under each method.

Frequently Asked Questions

Q: Do I need to tell HMRC which method I am using? A: You declare it on your Self Assessment return (and on the final declaration under MTD). Cash basis is the default, so no positive action is needed if you are using it. If you want to opt out and use accruals, you make an election on your return.

Q: Can my letting agent's statements use cash basis or accruals? A: Letting agents typically issue statements on a cash basis — showing what was actually received from the tenant and what was actually paid out — which aligns well with cash basis accounting. If you are on accruals, you may need to adjust the agent's figures for rent that was due but not received, or expenses that were incurred but not paid.

Q: Is cash basis available for all types of property income? A: Cash basis is the default for most landlords with gross property income up to £150,000. Above that threshold, accruals is required. The rules apply to your total UK property business (or your total foreign property business, separately).

Q: Can I switch from accruals to cash basis, or vice versa? A: Yes, but transitions have specific rules to avoid income or expenses falling between the two methods. Talk to an accountant before making the switch — there can be one-off tax consequences from the change.

Q: Does cash basis work with MTD-compatible software? A: Yes. Most MTD-compatible software supports cash basis natively, and many make it the default setting for small businesses and landlords. If you are choosing software, check that it handles your preferred method smoothly.

Conclusion

For most small landlords and sole traders, cash basis is the simpler, lower-admin, better-fitting choice for MTD — which is why it is the default. But default is not compulsory. If your business has significant stock, long-term contracts, or complex timing differences between invoicing and payment, accruals accounting may still be the right call. Review the choice against your own situation, and if in doubt, talk to your accountant. Either way, get the method right before you start MTD quarterly reporting — switching later is disruptive and can create one-off tax consequences you would rather avoid.