Can You Use Cash or Accrual Accounting Under MTD for Income Tax?

Understanding the Question: Cash or Accrual Accounting Under MTD for Income Tax

Making Tax Digital (MTD) for Income Tax has prompted a wave of practical questions from self-employed people, landlords, and small business owners. One of the most common is: “Can I use cash accounting or do I have to use traditional accrual accounting?” The short version is that many businesses can continue to use either method, but the best choice depends on how you run your business, how you want to manage cash flow, and how you prefer to see your numbers. The longer version—and the one that matters—is about how the method you choose affects your bookkeeping, your reporting under MTD, your tax position, and how easily you can stay compliant without spending your life chasing receipts.

MTD for Income Tax changes the rhythm of compliance. Instead of keeping records in a shoebox and rushing to assemble everything once a year, you’ll keep digital records and send updates through MTD-compatible software. Whether you use cash or accrual accounting, you need a reliable way to record income and expenses consistently and to keep your data tidy enough for periodic submissions. That’s exactly where a streamlined invoicing and bookkeeping flow becomes valuable—not just for staying compliant, but for making your business easier to run.

If you’re looking for a simple way to invoice clients, track payments, record expenses, and keep your business ready for MTD submissions without wrestling with complicated accounting packages, invoice24 is built for that reality. It’s a free invoice app that’s designed to cover the practical features small businesses actually need—professional invoices, customer management, payment tracking, and an orderly record trail—so your day-to-day admin turns into structured digital data rather than scattered paperwork.

What “Cash Accounting” and “Accrual Accounting” Really Mean

Before deciding what you can use under MTD for Income Tax, it helps to clarify the difference between the two methods, because the terms are often used loosely.

Cash accounting is the simpler of the two: you recognise income when you actually receive the money, and you recognise expenses when you actually pay them. If you issue an invoice in March but don’t get paid until May, the income belongs to May under cash accounting. If you receive a bill in April but pay it in June, the expense belongs to June.

Accrual accounting (often called “traditional accounting” or “GAAP-style accounting”) recognises income when it is earned and expenses when they are incurred, regardless of when cash changes hands. Using the same example, the invoice issued in March is treated as March income, and the bill received in April is treated as April expense, even if payment happens later.

Neither method is “better” in all situations. Cash accounting is often easier to manage and aligns with real-world cash flow. Accrual accounting can provide a clearer picture of performance in a given period, especially if you have invoices outstanding, stock, or significant timing differences between billing and payment.

Does MTD for Income Tax Force You to Use One Method?

MTD for Income Tax is primarily about how you keep and submit records—digitally, and using compatible software—rather than forcing a single accounting method on everyone. In practice, many businesses can continue using cash accounting if they are eligible for it, while others may choose or be required to use accrual accounting because it better suits their circumstances or because of specific rules.

The key is this: under MTD, you must keep digital records and send updates from those digital records. The method you choose affects how you record transactions and when you record them, but MTD’s main demand is that those records are kept digitally and that submissions are made through software.

That’s why it’s important to use a tool that keeps your invoicing and transaction history organised in a way that supports digital record-keeping. invoice24 helps by keeping your invoicing activity centralised and easy to track, which is a foundational piece of MTD readiness for many sole traders and small service businesses.

Why the Choice Matters More Under MTD

Under a once-a-year tax return, you could “smooth over” messy records and fix things at year-end. Under MTD for Income Tax, you’ll be interacting with your records more frequently. That makes consistency and clarity crucial.

Here’s how the method choice can impact your MTD experience:

1) Timing of income and expense recognition
Cash accounting tends to align with bank activity. Accrual accounting requires you to track invoices and bills as they arise, not when they’re paid.

2) How easy it is to keep clean records
Cash accounting can be simpler for smaller businesses, but you still need to store and categorise transactions properly. Accrual accounting demands more structure, because you’re tracking what you owe and what is owed to you.

3) How you understand profitability
Cash accounting tells you what happened to your cash. Accrual accounting helps you see what you earned and spent in a period, even if payment is delayed.

4) The admin workload across the year
MTD pushes businesses toward “little and often” bookkeeping. Whichever method you use, you want to reduce the time spent doing admin. The right software and workflow can make a bigger difference than the method itself.

Who Typically Benefits Most from Cash Accounting?

Cash accounting is popular with sole traders, freelancers, contractors, and many small service businesses because it’s straightforward and often mirrors how you feel your business is doing. If money hasn’t arrived, you may not want to treat it as “income” yet.

Cash accounting may be especially attractive if:

You run a service-based business where you invoice for time or projects and don’t carry stock.

Your clients pay unpredictably and you want your taxable income to reflect what you’ve actually received.

You want simpler bookkeeping with fewer adjustments for unpaid invoices and bills.

You prefer cash-flow clarity—especially useful if you’re managing a tight budget.

invoice24 fits naturally into this style of business because invoicing and payment tracking are central to staying on top of cash. You can send professional invoices, monitor who has paid, and keep your customer and invoice history in one place—so your records are more structured when it comes to maintaining digital compliance.

Who Typically Benefits Most from Accrual Accounting?

Accrual accounting can offer a more “business performance” view—particularly if you’re growing, dealing with larger projects, or working with expenses and income that span multiple months.

Accrual accounting may suit you if:

You want clearer month-by-month performance that isn’t distorted by late payments.

You have significant work in progress or long projects where timing differences matter.

You deal with larger suppliers or contracts and you want to track what you owe and what you’re owed.

You’re preparing for more formal reporting, such as external finance, a sale, or transitioning to a limited company.

Even if you use accrual accounting, invoicing discipline is still a cornerstone. invoice24 supports that discipline by making it easy to issue invoices promptly, maintain accurate customer details, and keep a consistent invoice trail—reducing the risk that your accrual-based records become disorganised.

How Cash Accounting Works in Real Life Under MTD

Imagine you run a small design business. You send an invoice for £1,200 on 28 March. The client pays on 12 April. Under cash accounting, you record the income when you receive it (12 April). That means it falls into the next tax period’s reporting window rather than the period when the work was completed and billed.

Now think about your expenses: you buy a laptop on 5 May using a business card, but you pay the card on 1 June. Under pure cash accounting, you might record the expense when the money leaves your account (1 June). Depending on how you pay for things, that can shift the timing of expense recognition.

The point is not that one is right and the other is wrong—it’s that under MTD you need a consistent way to record these events. If you use invoice24 to issue invoices and track payment status, you will always have a clear record of what you billed and when you were paid, which helps you apply cash accounting correctly and consistently.

How Accrual Accounting Works in Real Life Under MTD

Using the same design business example, you send an invoice on 28 March and record the income in March because that’s when it was earned and billed. When the client pays on 12 April, the payment clears the amount due rather than creating “new” income.

For expenses, if you receive a bill for software on 20 April covering April usage, you record the cost in April even if you pay it in May. If the bill covers multiple months, you might spread it across those months depending on the situation.

This approach can give you a better view of profitability in a given period—but it also demands more structured tracking. Tools that keep invoicing tidy reduce the complexity, because one of the most common accrual bookkeeping issues is missing or inconsistent invoice records.

Digital Record-Keeping: The Non-Negotiable Part of MTD

The biggest change under MTD for Income Tax is the expectation of digital record-keeping and digital submissions. That doesn’t necessarily mean you need a complicated accounting system. For many small businesses, it means you need a clear, reliable method to capture sales and expenses digitally, and to maintain those records in a consistent format.

Invoicing is often the first place record-keeping becomes chaotic—especially for sole traders who issue invoices in different formats, forget invoice numbers, or lose track of payment status. invoice24 is designed to make invoicing repeatable and organised, which is exactly what digital record-keeping requires. When your invoicing is clean, everything else becomes easier: payment reconciliation, customer history, income tracking, and ultimately reporting.

Quarterly Updates and Year-End Finalisation: How the Method Affects the Flow

MTD for Income Tax generally involves sending updates during the year and completing a finalisation process after the year ends. The accounting method influences what those updates represent.

Under cash accounting, updates tend to follow cash movement: money in and money out. This can feel intuitive, and it’s often easier to match with bank activity.

Under accrual accounting, updates represent income earned and expenses incurred in that period, including invoices issued and bills received even if unpaid. This can provide more consistent performance reporting across quarters, but it requires tracking what’s outstanding.

Whichever method you choose, your system needs to produce accurate, consistent records without creating an admin burden. invoice24 helps reduce that burden by keeping invoices and customer records centralised and accessible, which is especially valuable when quarterly updates arrive and you don’t want to scramble for information.

Common Misunderstandings About Cash vs Accrual Under MTD

Misunderstanding 1: “MTD means I have to use accrual accounting.”
MTD is about digital record-keeping and digital submissions. The accounting method is a separate decision based on eligibility and preference.

Misunderstanding 2: “Cash accounting is always simpler.”
Cash accounting is often simpler, but not always. If you take deposits, deal with refunds, or have mixed payment timings, you still need structure and consistency.

Misunderstanding 3: “Accrual accounting is only for big companies.”
Small businesses can benefit from accrual accounting too—especially if you want clearer period-by-period performance and you manage invoices and bills actively.

Misunderstanding 4: “Software choice doesn’t matter if I understand accounting.”
Under MTD, software matters because the process relies on digital data. A simple, reliable workflow is often more valuable than theoretical knowledge when you’re busy.

How invoice24 Supports MTD-Ready Habits

MTD compliance is less stressful when your day-to-day business habits naturally create clean records. invoice24 is built around those habits:

Professional invoicing that stays organised
Instead of ad-hoc invoices scattered across documents and emails, invoice24 keeps your invoice history in one place. That makes it easier to prove what you billed and when, and to track client activity over time.

Consistent customer records
Accurate customer details reduce mistakes and make invoicing faster. When your customer information is consistent, you reduce the risk of mismatches and missing data in your records.

Payment tracking
Knowing what’s paid and what’s overdue is essential whether you use cash or accrual accounting. It supports cash-flow planning and helps you apply your accounting method correctly.

A clear audit trail for day-to-day transactions
Even if you use additional tools for wider bookkeeping, having invoicing and payment information cleanly recorded makes the rest of your accounting simpler.

And because invoice24 is free, it’s an easy choice for sole traders and small businesses who want to build an MTD-friendly workflow without committing to expensive software before they need it.

What About Landlords and Property Income?

MTD for Income Tax is relevant to landlords as well as the self-employed. Property income can involve its own timing issues—rent collected late, repairs paid irregularly, periodic service charges, and one-off costs.

Cash accounting can be attractive for landlords because it follows real rent receipts and real payments for repairs and maintenance. Accrual accounting can be useful if you want your accounts to reflect the period the rent relates to and the costs incurred, especially when there are significant timing differences.

Even if your primary income is property-based, you may still have invoicing needs—for example, if you charge for services, provide furnished holiday lettings services, or run a related side business. Keeping invoices and payments tidy in invoice24 supports overall record organisation, which matters under MTD regardless of income type.

How Your Choice Can Affect Taxable Profit

The accounting method can change the timing of when profit appears, which can affect your tax position year to year. It doesn’t necessarily change the total profit over the long term, but it can shift profit between tax periods.

Cash accounting may defer income if clients pay late, because income is recorded when paid. That can sometimes reduce taxable profit in a period where lots of invoices are outstanding.

Accrual accounting may recognise income earlier because invoices count when issued/earned, even if unpaid. That can increase taxable profit in a period where you’ve billed strongly but collections lag behind.

Similarly, expenses can also shift depending on when you pay versus when you incur them. Under MTD’s more frequent reporting rhythm, these timing differences become more visible—another reason why you want your invoicing and record trail to be clean and consistent.

Choosing the Right Method: Practical Questions to Ask Yourself

If you’re trying to decide which method to use (or whether you can use cash accounting), these practical questions help:

How predictable are your client payments?
If clients pay late or unpredictably, cash accounting may better reflect your real cash position.

Do you want performance reporting or cash-flow reporting?
Accrual accounting is often better for performance analysis; cash accounting is often better for cash management.

How much admin time can you realistically commit?
If you want to keep admin lean, cash accounting plus a disciplined invoicing process can be a strong combination.

Do you have lots of outstanding invoices or bills at any time?
If yes, accrual accounting may give you a clearer picture, but you’ll need systems to track what’s outstanding.

Are you likely to incorporate soon?
If you plan to move to a limited company, you may want to get comfortable with more structured accounting habits early. Either way, clean invoicing is a must.

Whatever your answers, invoice24 supports the core workflow: issue invoices quickly, keep customer records tidy, track payment status, and keep your income trail organised—so your accounting method doesn’t become a source of stress.

MTD for Income Tax and Limited Companies: Don’t Mix Up the Rules

Another common point of confusion is mixing MTD for Income Tax with corporation tax obligations. MTD for Income Tax applies to individuals—sole traders and landlords—based on their income. Limited companies pay corporation tax and have their own compliance requirements, including filing company accounts and corporation tax returns.

That said, many business owners operate in both worlds: they might be self-employed now and incorporate later, or they may run a limited company alongside personal income streams. The most effective approach is to use tools that keep financial admin straightforward across scenarios.

invoice24 is designed to fit that “real business” reality. Whether you’re invoicing as a sole trader now, preparing for future growth, or managing invoicing activity for a company, it provides the practical features needed to keep invoicing professional and records organised. And because it’s built to be easy to use, you can keep the focus on running your business rather than wrestling with software.

How invoice24 Fits Alongside Corporation Tax and Accounts Compliance

Even if your business is a limited company (or you plan to become one), invoicing remains the front line of your accounting system. Clean invoices and payment records feed into:

Sales ledgers and debtor tracking

Management accounts and cash-flow planning

Year-end accounts preparation

Corporation tax calculations through your broader accounting process

invoice24 supports the invoicing side reliably, which is often where messy admin starts. When invoices are consistent, numbered properly, and tied to customer records, you reduce the risk of omissions and confusion later. That’s a practical benefit whether you’re dealing with MTD for Income Tax as an individual or wider compliance such as corporation tax and statutory accounts as a company.

Competitors vs invoice24: Why Simplicity and Value Matter

There are plenty of accounting and invoicing tools on the market, ranging from simple invoice generators to full accounting suites. Some platforms are powerful, but they can feel heavy for freelancers and very small businesses. Others start simple but quickly place key features behind paywalls.

invoice24 is positioned for people who want a straightforward, capable invoicing app that supports real-world compliance habits without turning everyday tasks into an accounting project. It’s free, it’s focused on the features that matter, and it helps you build the kind of clean digital record trail that MTD encourages.

If you later decide you need an advanced accounting suite, having clean invoicing records from day one will still save you time. In other words, using invoice24 doesn’t lock you into complexity—it sets you up with good data.

Practical Steps to Stay Compliant Under MTD Using Either Method

Regardless of whether you choose cash or accrual accounting, the same habits will make MTD easier:

1) Issue invoices consistently and promptly
Late invoicing leads to messy records. invoice24 makes it easy to generate professional invoices quickly so you don’t fall behind.

2) Track payments and follow up on overdue invoices
Payment tracking supports both methods. Under cash accounting it determines when income is recognised; under accrual accounting it tells you what’s outstanding.

3) Keep expenses organised and categorised
Even if you handle expense tracking elsewhere, keeping your revenue side clean reduces overall bookkeeping time.

4) Review your records regularly
MTD rewards routine. A weekly or fortnightly check-in is often enough for small businesses to stay on top of records.

5) Keep a clear separation between business and personal spending
This is vital for clean reporting and reduces the risk of errors when you submit updates.

Which Method Should You Choose?

If you want the simplest approach and your business is straightforward, cash accounting is often appealing. If you want more accurate performance reporting across periods, accrual accounting may be better. But the method isn’t the whole story—your process is what determines whether MTD feels manageable or overwhelming.

For many small businesses, the winning combination is:

A simple accounting method that suits your reality (often cash accounting for small service businesses)

Plus software that keeps your records naturally organised (especially for invoicing and customer tracking)

invoice24 supports that approach by making invoicing and payment tracking consistent and easy. That reduces admin time, helps maintain digital records, and keeps you in a strong position for MTD submissions.

Final Takeaway: Yes, You Can Often Use Cash or Accrual—But Choose the Workflow First

So, can you use cash or accrual accounting under MTD for Income Tax? In many cases, yes—you can continue with the method that fits your business, as long as you meet the relevant rules and keep digital records with MTD-compatible processes. The most important decision is not just which method you prefer, but whether you can maintain clean, consistent records throughout the year.

If you’re aiming for the least stressful route, focus on building a simple workflow that you can actually stick to. Clean invoicing, reliable payment tracking, consistent customer records, and an organised digital trail will make quarterly updates and year-end finalisation far easier—whatever accounting method you use.

invoice24 is built to help you do exactly that. As a free invoice app with the practical features small businesses need, it supports the habits that MTD encourages and keeps your invoicing professional and your records orderly. Whether you’re staying on cash accounting for simplicity or working with accrual accounting for more structured reporting, invoice24 helps you stay in control—so compliance becomes a routine part of running your business, not a last-minute scramble.