Simpler Income tax for the Simplest Small Businesses
From the 2013/14 tax year the Revenue are giving self-employed individuals or partnerships the choice to do their accounting on a cash basis, as an alternative to the current accruals basis.
If your sales receipts are below the VAT threshold (currently £79,000) you are eligible to use the scheme and this level is doubled where the business owner is a recipient of Universal Credit.
Businesses must leave the scheme if receipts exceed twice the VAT threshold (currently £158,000).
Small businesses that operate through either a limited company or a limited liability partnership (LLP) cannot use the cash basis. The Companies Act will still apply and there will be no change on how the accounts are prepared.
What will the change to cash accounting mean to me?
Your income will be based on the amount that you have receive not the invoiced amount (thus ignoring any debtors) and your expenses are what you have paid, not what is owed ( thus ignoring any creditors). The profit is simply the difference between the two.
There are changes to some of the expenses and how they are claimed. For example a flat rate allowance for motor expenses and use of home for the business has been introduced.
Stock is an accounting concept and is therefore irrelevant.
Assets such as plant or machinery and vans are an allowable expense.
However, there are also restrictions regarding business losses and how they can be offset.
Record keeping will be easier using the cash basis especially if the business bank account is used for all business transactions as this will can be the main financial records. It will still be necessary to keep invoices and receipts in case HMRC wishes to see them.
Do I need to switch to cash accounting?
The new, simpler scheme should be suitable for most small businesses, however there are certain businesses that do not qualify. It will be entirely voluntary and any business using the new scheme will be free to go back to the normal rules.
There are certain rules that need to be followed when joining or leaving the scheme. Careful record keeping is needed to eliminate income or expenditure being counted twice or not at all.
See here for more information.
Commentary – A Health Warning
Whilst the cash basis being introduced for 2013/14 is suitable for many small businesses, it is not suitable for all. The nature of accruals accounting is that it spreads profits on a more even basis over a number of years, and by only measuring actual money received and paid, it is possible to skewer results so that allowances are lost, or that tax is deferred to much larger levels. If you have a business that holds stock, has debtors or creditors, or even has losses, you may be worse off under the cash accounting basis. Tread carefully!