BIM72072 | Cash basis: transitional adjustments: leaving the cash basis: prepayments

If a business were to pay its business rates (for example) for the whole year up front, some of that payment could be a prepayment.

Example

12 months business rates of £1,200 is paid in March 2025, for the rates year commencing 1 April 2025, while in the cash basis. So 360 days’ worth of rates (£1,183) has been prepaid (covering period 6 April 2025 to 31 March 2026).

The business gets a tax deduction for the full £1,200 paid in the tax year ending 5 April 2025 under cash basis rules.

The business subsequently elects to prepare accruals based accounts for the tax year commencing 6 April 2025. For those accruals based accounts to be correctly prepared, they would have to include an expense for the business rates that related to the period (6 April to 5 April 2026) so would include an expense for the £1,183 ( prepaid rates for the period 6 April 2025 to 31 March 2026) above. The profit figure from those accounts would be the starting point for the taxable profits.

It looks like the business would get a deduction twice for £1,183 of the rates that had been prepaid: once in the cash basis period, and again in the first accruals accounts period.

To prevent this, the legislation requires that the expense that is brought into the accruals based accounts that relates to an amount prepaid while in the cash basis is disallowed for tax.

So in this example, the £1,183 (the amount of the prepayment made in the last cash basis period) would be disallowed when calculating the taxable profits for the tax year ending 5 April 2026.