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Article contributed by ACCA

Changes to the cash-accounting regime are intended to simplify tax obligations for small businesses.

An unincorporated business with a turnover below the VAT registration threshold will be able to start accounting for its income and expenses using a simplified cash-based regime. The government intends to link the cash-accounting regime to the VAT registration threshold and the ‘three-line account’ limit in income tax self-assessment returns.

This should make it easier for small businesses to meet their tax obligations and give them greater certainty over their tax affairs. 

Eligible businesses

A person is eligible to enter the cash-basis regime if the total receipts are less than the amount of the VAT registration threshold. The recipients of universal credit may enter the scheme if the total receipts are less than twice the limit (currently £154,000). Where the basis for a tax year is less than 12 months, the VAT threshold is proportionately reduced.

Cash accounting can be used by individuals or partnerships that meet the above size criteria and are not excluded persons or trade. Excluded from the regime are:

  • limited liability partnerships
  • Lloyd’s underwriters
  • businesses with a current herd-basis election
  • any person that made a claim for averaging of fluctuating profits
  • dealers in securities
  • ministers of religion
  • intermediaries treated as making employment payments
  • managed service companies
  • waste disposal
  • cemeteries and crematoria.

Eligible barristers will be able to choose either to use the new cash basis and simplified expenses or the current accruals basis. The existing cash-basis legislation for barristers will be repealed (except for barristers already using it, for the remainder of their qualifying period).

Key features of cash accounting

In essence, under the cash-basis regime, a business’s taxable profits will be the total amount of receipts less the total payments of allowable expenses, subject to adjustments required or authorised by law in calculating profits for income tax purposes.

The regime includes a series of flat-rate allowances for car expenses, use of home and interest payments:

Car and vehicle expenses

  • Based on business mileage rather than deductions for actual expenditure on purchasing, maintaining and running a vehicle or motorbike.
  • Based on HMRC’s approved mileage allowance payments, currently 45p/mile up to 10,000 miles, then 25p/mile, with 24p/mile for motorbikes.

Businesses using the cash basis will not have to use the simplified flat-rate expenses for their cars and have the option to claim any allowable proportion of actual expenses if they so elect.

Use of home

Expenses relating to business use of home can be deducted for each month, according to the amount of time spent working at home:

  • 25-50 hours per month: £10
  • 51-100 hours per month: £18
  • 101 hours or more per month: £26.

Businesses will still have the option to claim any allowable portion of actual expenses if they so elect.

Business premises used both as a home and business

Where business premises are used partly for private purposes as a home a standard monthly adjustment of:

  • £350 for one occupant
  • £500 for two occupants
  • £650 for three or more occupants

can be made based on the number of occupants using the premises as a home. Alternatively, businesses can choose to identify the allowable portion of actual costs if they prefer.

Interest payments

If a person carrying on a trade in a period pays any interest on a loan during the period then an allowance of up to £500 will be available for interest payments.

Capital expenditure and capital receipts

Capital allowances will remain available for expenditure on cars only. For all capital expenditure other than cars and excluded assets the taxpayer is given tax relief when payments are made.

Proceeds arising from the disposal of those assets or any amount of compensation received in respect of the asset are brought into account as a receipt in calculating the profit of the trade. Excluded assets are land, intellectual property, shares, other businesses and non-depreciating assets.

Losses

Business losses may be carried forward to set against the profits of future years but not carried back or set off ‘sideways’ against other sources of income. So a taxpayer with other sources of income (ie employment) is unable on the cash-accounting basis to set the losses against the employment income; they would need to use generally accepted accounting principles (GAAP) where loss relief is available.

Businesses using the cash basis will continue to do so until their circumstances change so that the cash basis is no longer suitable for them.

Suggested clauses to engagement letters, to take account of the cash-basis option for self-employed individuals or partners carrying on the smallest businesses from 2013/14, will be available on ACCA’s Technical Advisory website at the end of the month.