Millhouses Accountancy Ltd

Millhouses Accountancy

The office, Gothic House, Barker Gate,

The Lace Market, Nottingham, NG1 1JU

Tel: 0115 882 0356

Mobile: 07450 989048

Email: nottingham@millhouses-accountancy.co.uk

 
Accountancy practice in nottingham

The Cash Basis of Accounting

Introduction

From the 2013/14 tax year the Government are allowing small self employed businesses such as Sole Traders and Partnerships to record their income and expenses, for their Self Assessment tax return using a new system called the Cash Basis.  To use the Cash Basis you have to be a small self employed business with a Turnover of £81,000 or less a year (the current threshold when you have to register for VAT).  Limited Companies and Limited Liability Partnerships cannot use the Cash Basis.

What is the Cash Basis and how does it work?

The Cash Basis is basically a much simpler way of recording your income and expenses for the purposes of your tax return.  You basically record money when it comes in and goes out of your business.  All money counts cash, card payments, cheques, postal orders, Paypal payments, BACS transfers.  You may choose how you record when money is received or paid, for instance the date money leaves your bank account or the date a cheque is written.  You must then use the same method each year.  Cash Basis doesn’t change the expenses you may claim, just when you claim them.  They still have to be valid business expenses of course.  So expenses such as electricity and fuel, stationery, things you purchase to sell on, and bank charges are deductible against income when you physically pay for them.  Interest payments up to a limit of £500 are allowed.  It is no longer necessary to calculate and claim Capital Allowances. Instead all purchases of equipment and furniture for ongoing use in the business are deductible in full against income as they are paid for.   This system is ideal for smaller sized businesses because you will only pay tax on money you have received from customers.  You won’t pay tax on invoices you have issued to customers if they have not paid you at the year end.   This is completely different to traditional accounting, called the Accruals Basis.  Using the Accruals Basis (which you may still use if you would prefer), income and expenses are recorded when an invoice is issued to customers or is received from suppliers.  This means income tax is payable on invoices issued to customers even if the invoice remains unpaid at the year end.  One thing which is immediately apparent from this is the adverse effect on cash flow of this system as opposed to the cash basis.

If you choose to use Cash Basis you would need to tick the Cash Basis box on the Self Assessment tax return.  You will also need to keep a record of business income received and business expenses paid.  If you are using Cash Basis and your business grows you may stay in the scheme up to an income of £162,000 (twice the amount of the VAT threshold).   When your income goes above that amount you will need to use traditional accounting for your tax return for the next year.  If you are VAT registered you can start to use the Cash Basis provided your income is £81,000 or less during the tax year.   You can record business income and expenses either including or excluding VAT but you must record them in the same way each year.  If you choose to record them inclusive of VAT you have to treat VAT payments you make to HMRC as expenses and VAT refunds from HMRC as income.

Summary

In summary the cash basis is a much simplified way of recording income and expenses for small businesses.  It allows you to record transactions as money is received or paid as opposed to recording them when invoices are issued to customers or received from suppliers.  The biggest advantage of this scheme is you only pay tax on income when money is received from customers.  It’s not suited to all small businesses and is optional.  However it certainly has cash flow advantages.

 

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