BIM74001 - Abolition of the cash basis: background

Historical overview

For many years the Revenue had a practice (most recently published as SP/A27) under which businesses which count as ‘professions’ or ‘vocations’ could, subject to certain conditions, compute their profits for tax purposes on a ‘cash’ or ‘conventional’ basis, rather than the ‘earnings’ or ‘accruals’ basis which traders and companies must adopt. Many professional businesses, including some of the largest firms of accountants and solicitors, used this practice. It is important to remember that this practice did not apply to traders.

On the cash basis receipts are recognised as income of the period in which they are received and expenses as outgoings of the period in which they are paid. Thus all debtors, creditors, stock and work in progress are excluded.

Broadly, on an earnings basis, income is recognised in the accounts when it is earned, that is when the services had been fully performed whether or not payment has been received. Expenses are recognised in the accounts when they are incurred rather than paid. This means that debtors and creditors are recognised and there can be a bad debts’ deduction. Other adjustments are made to match expenses with income. The costs incurred that are used to earn profits in a later accounting period are carried forward. The charge in the profit and loss account in the period is offset by including a closing work in progress valuation.

The conventional basis is neither a cash basis nor a full earnings basis. On the conventional basis debtors and creditors are included but work in progress is omitted.

Finally there is the hybrid basis. This is a basis which is neither a conventional basis nor a cash basis. Receipts are recognised when received but expenses are recognised when incurred. There is no adjustment for work in progress.

For tax purposes the computation must now be on a basis that gives a true and fair view - see BIM74010. Other than for Barristers or Advocates in the first seven years of practice (see BIM74020), the cash basis is no longer available.