1049 - Cash Basis Accounting

Overview

You can start using cash basis from 6 April 2015 and if you:

• run a small business e.g. sole traders and partnerships
• have an income of £82,000 or less a year (this is the threshold to register for VAT)

You can also decide not to use cash basis if it's not suited to your business.

Why use cash basis

If you

• run a small business, cash basis accounting may be better than traditional accounting
• you only need to declare money when it comes in and out of your business
• 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.

When cash basis might not suit your business

If you:

• want to claim interest or bank charges of more than £500 as an expense
• run a business that's more complex, eg you have high levels of stock
• need to get finance for your business - a bank could ask to see accounts drawn up using traditional accounting to see what you owe and are due before agreeing a loan
• have losses that you want to offset against other taxable income ('sideways loss relief')

Income and expenses under cash basis

• you only count the money you've actually received and expenses you've actually paid in a tax year
• money you're owed isn't counted until you receive it
• payments count - cash, by card, cheque, payment in kind or any other method

Examples of allowable business expenses:

• office costs, eg stationery
• travel costs, eg fuel, parking, train or bus fares
• clothing expenses, eg uniforms
• staff costs, eg salaries or subcontractor costs
• things you buy to sell on, eg stock or raw materials
• financial costs, eg insurance or bank charges
• costs of your business premises, eg heating, lighting, business rates
• advertising or marketing, eg website costs

Capital allowances

If you use cash basis accounting and buy a car for your business, you can claim this as a capital allowance. However, all other items you buy and keep for your business should be claimed as allowable expenses in the normal way.

Other considerations

• businesses using traditional accounting (accruals basis) might have to make some adjustments if they switch to cash basis
• you can choose how you record when you receive or pay money (e.g. 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
• 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
• a loss incurred by a business adopting 'Cash basis' can only carry forward. No sideways or earlier year's tax relief can be claimed
• your business grows during the tax year you can stay in the scheme up to an income of £164,000. Above that you'll need to use traditional accounting for your Income Tax return for the next tax year, unless your income drops back below the VAT threshold in place at the end of that tax year

Losses

• any losses you make can't be set off against your other income
• terminal loss must be set against any profits (after deducting losses brought forward) from the same business taxed in 2017 to 2018
• any remaining terminal losses must be set against the profits of the same business taxed in the 3 prior years. Starting with the latest year

Who 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
• limited companies
• limited liability partnerships
• 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

If you can't use cash basis, you'll need to use traditional accounting to work out your taxable profits.