Use cash basis?

HMRC have produced YouTube videos to help small businesses decide if they can use the ‘cash basis’ scheme and the ‘simplified expenses’ scheme, both launched in April 2013, to simplify their accounting processes for the new tax year say Harris & Co accountants Northampton. Phil Harris, Principal of Harris & Co accountants Northampton, says "The cash basis is in fact not a simplification at all. It is actually quite complex to use and without an accountant to guide them, most small businesses will get in a muddle if they try to use it."

HMRC are urging small businesses to consider the ‘cash basis’ scheme which will allow them to be taxed on money that flows in and out of their business, rather than using full accounting rules. The scheme, which can be used by sole traders and other unincorporated businesses with an annual income of less than £79,000 (the current VAT registration threshold), was launched in April 2013. Under the scheme, small businesses can elect to be taxed on the basis of the cash that passes through their books, rather than having to do calculations designed for bigger or more complex businesses based on generally accepted accounting practice. A small business will simply need to work out the cash received in a tax year, less any money spent on allowable business expenses, when calculating its profits.

Once a business has entered the ‘cash basis’ scheme, they can continue to report in this way until their income reaches double the VAT threshold (currently £158,000).

Businesses can also choose to use the ‘simplified expenses’ scheme, which allows the calculation of some expenses, namely business costs for vehicles; expenses relating to business use of home; and expenses relating to private use of a business premises as a home, using flat rate allowances or adjustments rather than apportioning actual expenditure. The ‘simplified expenses’ rules are entirely optional for businesses using the cash basis, and any unincorporated business (excluding partnerships where any of the partners are not individuals) can use them whether or not they have chosen to use the cash basis.