Cash Basis Accounting for Small Businesses

Key features

Cash basis is a way of working out a business’s income and expenses for a Self-Assessment Tax Return. The cash accounting regime is voluntary and available to unincorporated businesses.

Using cash basis requires records to be kept in a certain way from April 2013- recording money when it actually comes in and goes out of the business (cash, card payments, cheque, and any other method).

A business’s taxable profits will be the total amount of receipts less the total payments of allowable expenses, subject to adjustments required or allowed by law. The regime includes a series of flat rate allowances for car expenses, use of home and interest payments. These simplified expenses allowances will also be available to businesses that do not apply the cash basis.

Who can use cash basis?

•   Small self-employed businesses (sole traders and partnerships).
•   Limited companies and limited liability partnerships can’t use cash basis.
•   Those businesses with an income of £79,000 or less a year (VAT registration threshold)
•   Businesses can start using cash basis from the 2013 to 2014 tax year.
•   If you’re using cash basis and your business grows during the tax year you can stay in the scheme up to an income of £158,000.

Whether to use cash basis or not?

Cash basis might suit smaller businesses because, at the end of the tax year, they won’t have to pay Income Tax on money they didn’t receive in the accounting period.

Cash basis probably won’t suit smaller business if they:

•   have losses they want to set against other taxable income.
•   run a more complex business (e.g. VAT registered, have higher levels of stock or produce  detailed accounts for other reasons).
•   want to deduct interest of more than £500.

How cash basis works

Receipts:

The business will need to record all amounts received relating to the supply of goods, services and self-employed work. Receipts will have to include tips, commissions, goods and services received in kind and any refunds for deductible expenses, including of VAT repayments.

Sale proceeds for anything that could be deducted as an expense and any grants will also have to be included. Property or other asset sales that would not be deductible as expenses would not be counted as receipts under the cash regime, nor would bank loans and other finance.

Expenses:

Outgoing expenditure for business use, including stock for sale, equipment, software, rent, wages and VAT paid out should be recorded and offset against income. Payments for business entertaining or purchases of long-lasting assets such as cars and properties are not allowable. Instead the taxpayer should apply the simplified flat-rate expense allowances:

•   Car and vehicle expenses will be based on business mileage.
•   Expenses relating to business use of home can be deducted for each month, according to the amount of time spent working at home. Businesses will still have the option to claim any allowable portion of actual expenses.
•   An interest payments allowance of up to £500.