The Cash Basis For Small Business
HMRC have introduced a new cash basis of accounting for small businesses to help them work out their income and expenses and it can be used for the 2013/2014 tax year onwards.
As the name suggests, when you use the cash basis you record your income when the money comes into the business and your expenses when the money goes out of the business. All types of money transaction should be included including cash, card payments, cheque and any other method.
One benefit for small business is that you don’t have to pay tax on money you didn’t receive in the accounting period. Your accounting records will have to record all the receipts and payments and when you complete your self-assessment tax return you have to tick the cash basis box.
It should be stressed you don’t have to use the cash basis if you are a small business and you should only use it if it benefits you but you must use the same method each year. If you decide to use the cash basis and your business grows you can continue using it up to an income of £158,000.
There are a number of reasons why you might not want to use the scheme, such as if you have losses you want to set against other income, you want to deduct interest of more than £500 or you have a complex business that requires detailed accounts.
The cash basis doesn’t change the types of expenses you can claim, just when you claim them. You only count the expenses you’ve actually paid.
Examples of allowable business expenses are:
• day to day running costs, e.g. electricity, fuel
• general business costs, e.g. stationery, business telephone, insurance, web hosting
• things you buy to sell on
• things you use in your business, e.g. machinery, computers
• interest and charges up to £500, e.g. interest on bank overdrafts
You cannot claim items not used in the business or entertaining costs but that is exactly as it is if you don’t use the cash basis.
HMRC have introduced a simplified expenses scheme instead of calculating expenses for cars, working from home or if you live on the business premises:
Using simplified expenses you record all your business mileage and then claim a flat rate per mile. For a car the flat rate is 45p per mile for the first 10,000 miles and 25p per mile thereafter.
If you use a motorcycle the rate is 24p per mile.
Use of home
Using simplified expenses you claim a flat rate based on the hours you work from home each month, providing you work at least 25 hours or more. Examples of working from home include maintaining your accounting records and time spent on your computer at home when trying to get new business.
Private use of business premises
In a small number of cases the business premises are also home, for example, the owner of a guest house will often live on the premises. If you use simplifies expenses you keep a record of all your expenses such as food, utilities etc. and then deduct a flat rate depending on the number of people who use the premises as home each month.
There are also a number of specific types of business that 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
• 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 would like to discuss the cash basis of accounting or any other topic please call Chris Wrighton or Mike Handley on 0330 123 5577