The simple life? The new cash basis for small businesses
April 2013 saw the introduction of a new cash basis for the purposes of calculating tax for small unincorporated businesses.
By simplifying the calculation of taxable income, the objective is to give small businesses greater certainty over the preparation of taxable income figures for their self assessment tax return and to clarify and simplify self assessment of business income. However, the measures will not be suitable for all small businesses, and certain businesses are excluded from the scheme.
Key aspects of the cash basis
The new measures allow eligible businesses to calculate taxable income figures on a simpler cash basis, if this suits the business. Such businesses will not have to compute figures of debtors, creditors and stock, or distinguish between ‘capital’ and ‘revenue’ expenditure, and they will not have to compute capital allowances to arrive at a taxable income figure.
The cash basis is available for businesses whose receipts for the year are less than the VAT registration threshold (£79,000 for 2013/14) or twice that (£158,000) for recipients of Universal Credit. However, businesses must leave the cash basis after their receipts exceed twice the amount of the VAT registration threshold.
The system works on a cash flow basis. For income, it is what the business receives, when it is received; for outgoings, it is what the business pays, when it pays it. Receipts include all amounts received in connection with the business, including those from the disposal of non-durable assets.
Allowable payments are expenses paid wholly and exclusively for the purposes of the trade, including non-durable assets. Interest payments are also allowed up to a limit of £500.
Business losses may be carried forward to set against the profits of future years, but not carried back or offset ‘sideways’ against other sources of income.
All unincorporated businesses may choose to use flat rate expenses for particular items of business expenditure.
Fixed allowances for business mileage are an option for the use of cars or motorcycles by businesses using the cash basis. This provides an alternative to calculating deductions for actual expenditure on purchasing, maintaining and running a motor vehicle or motorcycle, apportioned between business and private use. The car rate may also be used for goods vehicles, such as vans, in some cases.
A flat rate can be used to calculate expenses relating to business use of the home, and a three tier banded rate is used to calculate the adjustment for private use of business premises. Both act as an alternative to deductions for actual amounts, apportioned between business and private use.
Businesses that do not choose to use the cash basis will have the option to use any or all of the simplified expenses as they wish.
Despite the stated aim of simplifying the system, cash accounting remains a complex area, and care should be taken when considering the pros and cons. We can advise you on the most appropriate system for your business – please contact us for further assistance.