Simpler Income Tax Cash Basis

September 24, 2014

What is “cash basis”?

Cash basis’ is a way of working out your income and expenses for your Self-Assessment tax return.

You can use cash basis if you:

  • are a small self-employed business eg sole traders and partnerships (limited companies and limited liability partnerships can’t use cash basis)
  • have an income of £81,000 or less a year (this is the threshold when you have to register for VAT)

You don’t have to use cash basis; you can decide if it suits your business. You can start using cash basis from the 2013 to 2014 tax year. Existing businesses using traditional accounting (accruals basis) might have to make some adjustments when they switch to cash basis. Contact us to find out more.

You can choose to record your business income and expenses over the tax year in 1 of the following ways:

  • using cash basis – record money when it actually comes in and goes out of your business (all money counts – cash, card payments, cheque and any other method)
  • using traditional accounting (accruals basis) – record income and expenses when you invoice your customers or receive a bill

Cash basis might suit smaller businesses because, at the end of the tax year, you won’t have to pay Income Tax on money you didn’t receive in your accounting period. If you choose cash basis or you’re already using it, just tick the cash basis box on the form when you send your 2013/14 Self-Assessment tax return.

What if my business grows?

If you’re using cash basis and your business grows during the tax year you can stay in the scheme up to a total business income of £162,000 per year. Above that you’ll need to use traditional accounting for your Income Tax return for the next tax year.

When cash basis might not suit your business

Cash basis probably won’t suit your business if you:

  • have losses that you want to set against other taxable income (‘sideways loss relief’ for existing businesses)
  • want to deduct interest of more than £500 as an expense
  • run a business that’s more complex, eg you’re VAT registered, you have higher levels of stock, you produce detailed accounts for other business reasons

Who can’t use the scheme?

Apart from limited companies and limited liability partnerships that can’t use cash basis, there are also some specific types of businesses that can’t use the scheme:

  • Lloyd’s underwriters
  • farming businesses with a current herd basis election
  • farming and creative businesses with a section 221 ITTOIA profit averaging election
  • businesses that have claimed business premises renovation allowance
  • businesses that carry on a mineral extraction trade
  • businesses that have claimed research and development allowance
  • dealers in securities
  • relief for mineral royalties
  • lease premiums
  • ministers of religion
  • pool betting duty
  • intermediaries treated as making employment payments
  • managed service companies
  • waste disposal
  • cemeteries and crematoria

What should I include in income?

With “cash basis”:

  • you only count the money you’ve actually received in a tax year
  • any money you are owed is not counted until you receive it
  • all payments count – cash, card, cheque, payment in kind or any other method
  • you can choose how you record when money is received or paid (eg the date the money enters or leaves your account or the date a cheque is written) but you must use the same 
method each tax year

What expenses can I claim?

Expenses are business costs you can deduct from your income to calculate your taxable profit. In practice, this means your allowable expenses reduce your Income Tax. You only count the expenses you have actually paid. Money you owe is not counted until you pay it.

Examples of allowable business expenses if you’re using cash basis are:

  • day to day running costs, eg electricity, fuel
  • administration costs, eg stationery
  • things you buy to sell on, eg stock
  • things you use in your business, eg machinery, computers, vans
  • interest and charges up to £500, eg interest on bank overdrafts

For the 2013/14 tax year you can also choose to use the simplified expenses scheme instead of calculating expenses for use of:

  • vehicles
  • working from home
  • making adjustments for living on your business premises

There are some types of expenses that you cannot claim, eg anything that is not used by your business.

Cars and other equipment

If you buy a car for your business, you can claim the purchase as a capital allowance (but only if you are not using simplified expenses to work out your business expenses for that vehicle).

Unlike traditional accounting, you claim other equipment you buy to keep and use in your business as a normal allowable business expense rather than as a capital allowance.

If you’re currently claiming capital allowances and want to switch to cash basis, HM Revenue and Customs (HMRC) have guidance on the changes you need to make.

VAT registered businesses

You can start to use cash basis if you’re VAT registered as long as your income is £81,000 or less during the tax year. You can record your business income and expenses either excluding or including VAT. However, you must treat income and expenses the same way.

If you choose to include VAT, you have to record:

  • VAT payments you make to HM Revenue and Customs (HMRC) as expenses
  • VAT repayments you receive from HMRC as income

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