Cash basis

Cash basis

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I have a client who wishes to use the new cash basis in completing their 2013/14 tax return.

Basically the nature of the clients he deals with are shockingly slow at paying - often taking 2 years.

His turnover is say £100K p.a. so at first glance he is not eliglble for cash basis (being well over the relevent maximum of the VAT threshold). However for 2013/14 his cash receipts are made up of say £50K debtors from 2012/13 (that have been reported on the 2012/13 return under accrual accounting) and £50K of sales from 2013/14 that have been received in 2013/14. There are debtors of £50K from 2013/14 that are paid in 2014/15.

The legislation says that a person may elect for the scheme is 'the aggregate of the cash basis receipts...during that tax year does not exceed any relevant maximum applicable for that tax year'

It goes on to say "the 'cash basis receipts' of a trade, profession or vocation, in relation to a tax year are any receipts that (a) are received during the basis period for the tax year and (b) would be brought into account in calculating the profits of the trade..for that tax year on the cash basis"

 I am unsure what 'brought into account' actually means here.  The way I read it is that when looking at eligibility for the scheme, you ignore any receipts during the year that were reported on a previous return, and so for my client, although he bills £100K year in, year out, he will be eligible for the scheme as his cash basis receipts during the year are only £50K as 2012/13 income is not 'brought into account'

Has anyone else come across this?

Replies (29)

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By johngroganjga
01st Oct 2014 12:37

I think that to say that your client's turnover for this purpose is only £50,000 is like trying to have your cake and eat it.

I am applying logic and common sense here, without looking at the legislation you are quoting from.  If there is a loophole in the legislation and your client wants to exploit it for one year so be it.  Clearly he will be above the threshold next year in any event. 

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Replying to justtoconfirm:
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By cbp99
01st Oct 2014 12:59

Cash basis turnover

[quote=johngroganjga]

I think that to say that your client's turnover for this purpose is only £50,000 is like trying to have your cake and eat it.

I am applying logic and common sense here, without looking at the legislation you are quoting from.  If there is a loophole in the legislation and your client wants to exploit it for one year so be it.  Clearly he will be above the threshold next year in any event. 

[/quote

My interpretation of the cash basis rules is that you can indeed have cake and eat it. Debtors at April 2013, paid in 13-14 would be accounted for on the 12-13 return, and payments received after 13-14 would count in 14-15.

With regard to leaving the scheme, one must leave in the year following the year in which receipts exceed twice the Vat threshold. So below the Vat threshold to enter, but a higher threshold for leaving. In addition, if receipts fall back under the Vat threshold, you can stay on cash basis. So you could have turnover of 80k, 200k, 80k in consecutive years and remain on cash basis. That's how it seems to me.

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James Reeves
By James Reeves
01st Oct 2014 12:30

How does he pay his VAT?

Out of interest, if his clients take 2 years to pay their bills, how does the business pay its VAT bill?

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By johngroganjga
01st Oct 2014 12:36

Presumably on the cash basis for VAT.

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By johngroganjga
01st Oct 2014 13:09

Yes of course that is how the turnover on the cash basis would be arrived at if the client were eligible to adopt it.

That is not my point.  My point is about saying that his turnover for the purposes of determining eligibility was, in any meaningful sense, £50,000.

But if the way the legislation is drafted allows him to say that, so be it.  I expressed no opinion on the legislation because I have not read it.

The turnover on his VAT returns will clearly be £100,000 rather than £50,000.  Does that inconvenient fact not get in the way anywhere?

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Replying to Di:
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By cbp99
01st Oct 2014 13:31

Eligibility for cash basis

johngroganjga wrote:

Yes of course that is how the turnover on the cash basis would be arrived at if the client were eligible to adopt it.

That is not my point.  My point is about saying that his turnover for the purposes of determining eligibility was, in any meaningful sense, £50,000.

But if the way the legislation is drafted allows him to say that, so be it.  I expressed no opinion on the legislation because I have not read it.

The turnover on his VAT returns will clearly be £100,000 rather than £50,000.  Does that inconvenient fact not get in the way anywhere?

Sorry if I missed your distinction. Ittoia 2005 S31A does in my view make it clear that "cash basis receipts" for the purpose of eligibility are those received during the basis period for the tax year, and HMRC seem to agree http://www.hmrc.gov.uk/manuals/bimmanual/bim70015.htm 

Whether Jon Griffey's type of scenario was envisaged by the legislators, who knows, but I think there would be a fair number of traders, suffering less extreme levels of delayed payment, who could enjoy a one-off cash flow benefit.

With regard to Vat, yes, the tax accounts will bear no relation to the Vat returns, and make for an interesting reconciliation.

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Replying to Di:
RLI
By lionofludesch
02nd Oct 2014 10:55

Beg to Differ

johngroganjga wrote:

The turnover on his VAT returns will clearly be £100,000 rather than £50,000. 

Not if he's on the cash basis, John.  It'll be £50,000 - less any VAT content.

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Replying to lionofludesch:
RLI
By lionofludesch
02nd Oct 2014 11:58

Not at all

johngroganjga wrote:

lionofludesch wrote:

johngroganjga wrote:

The turnover on his VAT returns will clearly be £100,000 rather than £50,000. 

Not if he's on the cash basis, John.  It'll be £50,000 - less any VAT content.

I agree about the VAT content, which will be taken off to produce the VAT return figure, but disagree with the rest because you are mixing up the cash basis for VAT, which has been around for years, with the cash basis for accounting purposes, which is new.  The cash basis turnover for accounting purposes is only £50,000 because of a one off adjustment to avoid double counting.  There is no such one off adjustment in the VAT figures as there is no risk of double counting to avoid.

I don't agree with that analysis.

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Replying to atleastisoundknowledgable...:
By johngroganjga
02nd Oct 2014 12:04

Why?

lionofludesch wrote:

I don't agree with that analysis.

Care to explain why?

In the example we are given the trader has made sales to the value of £100,000 (assume including VAT) and also received cash of £100,000 from his customers.  Why would the outputs that go on his VAT returns not be £100,000 less the VAT content either way? 

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Replying to lionofludesch:
RLI
By lionofludesch
02nd Oct 2014 13:44

Mistaken

johngroganjga wrote:

lionofludesch wrote:

I don't agree with that analysis.

Care to explain why?

In the example we are given the trader has made sales to the value of £100,000 (assume including VAT) and also received cash of £100,000 from his customers.  Why would the outputs that go on his VAT returns not be £100,000 less the VAT content either way? 

We're clearly speaking of two different scenarios, John.

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By johngroganjga
01st Oct 2014 13:35

It's just a bit puzzling that someone whose VAT returns say that they turned over £100,000 can elect for the cash basis for accounting purposes on the basis that their turnover in the same period was less than the VAT registration threshold!

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By Paul Hawes
01st Oct 2014 14:55

Seems ok

From what I've read it seems like you should be eligible for the cash basis. The 12/13 income has already been reported as £100k so the money received for debtors wouldn't be additional income to report in 13/14. Cash basis says income is reported as the cash received - so if you ignore the debtors received and only take the other cash received into account you're going to be below the threshold. 

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By johngroganjga
01st Oct 2014 15:05

Again, the question is not whether gross income on the cash basis if the client were eligible would be £50,000.  Of course it would.

The question is whether client can use £50,000 as the figure to measure his turnover against the VAT registration threshold to determine his eligibility to adopt the cash payment basis for accounting purposes.  One thing's for sure - he wouldn't be able to use the same figure to determine whether he was above the VAT registration threshold for VAT registration purposes!

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By Paul Hawes
01st Oct 2014 15:43

Not so clear then...

Gov.uk does adjust its wording slightly when saying who can join the cash basis scheme. "You can start to use cash basis if your total business income is £81,000 or less a year."

I see your point now - it says "total business income" as though it's somehow different from how "income" is measured, so perhaps there might be a problem with electing to use the cash basis.

Guess the answer is to ring HMRC. 

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Replying to dgilmour51:
James Reeves
By James Reeves
01st Oct 2014 22:27

The triumph of hope over experience...

Paul Hawes wrote:

Guess the answer is to ring HMRC. 

Make sure to ring them several times, so you get several different answers.

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By jon_griffey
01st Oct 2014 17:50

Determining eligibilty

Thanks all for your responses - very much appreciated.

@johngroganjga is correct in that the point I am looking at is in determining eligibility to use the scheme. The nub of the issue is interpretation of s31A(5) ITTOIA 2005.

(5) For the purposes of this section, the “cash basis receipts” of a trade, profession or vocation, in relation to a tax year, are any receipts that—

(a) are received during the basis period for the tax year,

and (b) would be brought into account in calculating the profits of the trade, profession or vocation for that tax year on the cash basis.

It doesn't appear to say what 'brought into account' means.  In my example, am I bringing into account the receipts in respect of 2012/13 debtors?  In the sense that I bring it into account at step 1 s31E and then making a transitional adjustment in step 3?  Or is it not brought into account because is is deducted and has no net effect?

 

 

 

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By cbp99
01st Oct 2014 19:31

Second look at the legislation

Having taken a second look at S31A I am beginning to wonder if my earlier optimistic view was correct. Btw I appreciate that the question is about eligibility.

I now find myself reading this as though subsection 5(b) continued with the words "... if this were not the first year within the cash basis."

However, the HMRC guidance is not clear, which may mean that they think the meaning is obvious, or they are not sure either!

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By thomas34
02nd Oct 2014 09:39

Cash Basis

I don't know the answer to the question and I don't care since all of my clients will be signing or have signed an agreement that accounts will continue to be prepared and assessed under the accruals basis.

What the OP has demonstrated is that in extreme cases (and it's with raised eyebrows that a taxpayer is apparently running a business on these terms) there is still a difference of opinion as to the correct treatment.

This difference is not the fault of the contributors to this thread but to the highly paid buffoons in the OTS who put forward this madcap idea in the first place.

 

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By Steve Kesby
02nd Oct 2014 10:25

Adjustment expense

There is nothing in the legislation that says you exclude income that has previously been brought into account. So your cash receipts are your cash receipts, even if they have been previously included in taxable profits of an earlier year on an accruals basis.

Chapter 17 of Part 2 of ITTOIA then tells you how you will get relief for any double-counting that has occurred. Effectively you identify the income and expenses that have been double-counted and then deduct the excess profits from your profits on the new basis as an adjustment expense.

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Replying to Manchester_man:
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By cbp99
02nd Oct 2014 10:32

@Steve Kesby

But does this address the eligibility point?

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Replying to Manchester_man:
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By andy.partridge
02nd Oct 2014 11:34

So . . .

Steve Kesby wrote:

There is nothing in the legislation that says you exclude income that has previously been brought into account. So your cash receipts are your cash receipts, even if they have been previously included in taxable profits of an earlier year on an accruals basis.

Jon's client is not eligible because they had receipts of £100k.

Is your 2nd paragraph saying what would happen if he had been eligible or is it qualifying your first paragraph to make him eligible?

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Replying to Manchester_man:
By jon_griffey
02nd Oct 2014 13:03

Adjustment expense

Steve Kesby wrote:

There is nothing in the legislation that says you exclude income that has previously been brought into account. So your cash receipts are your cash receipts, even if they have been previously included in taxable profits of an earlier year on an accruals basis.

Chapter 17 of Part 2 of ITTOIA then tells you how you will get relief for any double-counting that has occurred. Effectively you identify the income and expenses that have been double-counted and then deduct the excess profits from your profits on the new basis as an adjustment expense.

Thanks for pointing that out. 

To recap s31A(5) says: -

For the purposes of this section, the “cash basis receipts” of a trade, profession or vocation, in relation to a tax year, are any receipts that—
(a) are received during the basis period for the tax year, and (b) would be brought into account in calculating the profits of the trade, profession or vocation for that tax year on the cash basis.

You are suggesting that total 2013/14 cash receipts (including 2012/13 debtors) are brought into account in measuring the 2013/14 cash basis receipts (and at this point my client fails the eligibilty test) and 2012/13 receipts are brought into account again at s231 to calculate the adjustment expense.  That is logical.  What I am suggesting is that is it a tenable interpretation of s31A(5)(b) to say that it is looking at the net result (a positive 'brought into account' plus a negative 'brought into account = no overall 'brought into account'). 

 

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By Steve Kesby
02nd Oct 2014 10:46

@cbp99

Yes. I though my first paragraph did.

Jon's client, in the example given, has cash receipts of £100K and an adjustment expense of £50K.

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By cbp99
02nd Oct 2014 11:41

@Steve

So, can I take comfort in thinking that my reading of S31A subsection 5(b), as though it continued with the words "... if this were not the first year within the cash basis.", is correct?

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By Steve Kesby
02nd Oct 2014 12:16

Yes

@ Andy My reading of the legislation is that you still have cash receipts of £100K. My second paragraph was more a what would happen if the cash basis did apply.

Say that instead of having received £50K from the brought forward debtors and £50K of the income earned in the current year, the figures were both £35K. The cash receipts would then be £70K and there would be adjustment expense of £35K.

In the real world you might prepare an income and expenditure account that showed only £35K of income to recognise the fact that the other £35K had already been treated as income, but for tax purposes that £35K income is cash receipts of £70K less adjustment expense of £35K.

@cbp99 I think in the above context you don't need to read extra words in. You need to disapply the assumption that this years receipts that have previously been included in turnover on an accruals basis should be excluded from cash basis receipts.

Once that assumption has been disapplied, there's nothing that makes the cash basis receipts of the first year any different (in what they're composed of) from those of any other year.

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By Steve Kesby
02nd Oct 2014 13:50

@ Jon

I just read the "would be brought into account" as meaning that in order to determine whether you're eligible to use the cash basis, you need to start as if you are going to use cash basis and calculate what your receipts figure would be. That figure is your cash basis receipts.

It would include for example adjustments required by s. 96A, but would exclude any capital receipts that did not fall within s. 96.

In my view, the cash basis receipts figure is all of the revenue receipts of the trade in the year, but if you did then use the cash basis you would get an adjustment expense to remove the profits that have already been taxed.

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By petersaxton
02nd Oct 2014 14:29

Cash basis

Aren't we glad that the cash basis has been brought in to make things simpler?

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RLI
By lionofludesch
02nd Oct 2014 17:29

It is simple

But - again - simple is not necessarily fair, Peter.

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