Cash-based accounting may be ill-advised in dentistry?

The Autumn statement of last week had some hidden ramifications, one of which could affect individuals and businesses buying and selling dental practices. Among the changes included in the statement by Chancellor Jeremy Hunt relates to how the self-employed manage their accounts. He wants to make the so-called ‘cash-based’ approach to accounting the default method.
From April 2024, the majority of self-employed people will be able to use this method, which recognises income and expenses only when money changes hands. Currently, there are restrictions on who can use the system.
Jeremy Hunt announced in his autumn statement on Wednesday Nov 22  he would be introducing legislation to remove those restrictions for self-employed individuals. While it is in essence simpler – we do not recommend it.
For starters, we can foresee problems when the cash-based system is used by a practice that is on the market. More onerous due diligence will be essential because there could be debts that are invisible to the buyer.
Also, we believe that dentists who suffer from clawback on their NHS contracts could pay more tax than necessary at an earlier date than if they continued to recognise the clawback liability under accruals based accounting. Dentists who get significant upfront payments, such as orthodontists or high-end private dentists, can get a distorted picture of their finances using the cash-based method. Their accounts may look unrealistically healthy when they have been paid up-front, but not yet done all the work.
We will be advocating to our self-employed clients – about 50% of our total number of dentist clients – that they elect to stick with accrual accounting, because it provides a more accurate picture for themselves and other users of their financial information.
The main headline of the autumn statement, of course, was the reduction in NIC for employees and the self-employed. This is welcome, but the other headline change, the increase in the national minimum wage, will mean that practice-owners are likely to find they will be under pressure to put up wages across the board. It will be important to ensure such increased costs are reflected in private fees being charged to maintain profitability.
Dentists are encouraged to get in touch for more information on how these changes might affect them