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Cash basis triggers expenses shake-up

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27th Mar 2013
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Amended Finance Bill 2013 clauses to implement the cash-accounting basis for tax have been accompanied by a changes to enact new, flat-rate expenses calculations within the new small business regime, notes Rebecca Benneyworth in her TaxCalc-sponsored Budget report.

The proposals for cash accounting for smaller eligible businesses were updated in February 2013 to include the transitional rules, and several further concessions were published alongside the Budget. But other clauses within the Finance Bill will affect the way expenses are taxed for wider businesses as well.

The flat rate expenses regime for businesses using cash accounting will not apply to companies, and there is a further restriction on partnerships in which one or more of the partners is not an individual.

The proposed legislation recognises three distinct types of flat rate deduction, the most important of which is for vehicles.

Expenditure on vehicles

The new rules apply where a deduction would be allowable in computing the profits of a trade for expenditure on a vehicle (or would be allowed if the expenditure were not capital in nature). The vehicles covered are cars, motorcycles and goods vehicles used for the purpose of the trade. Vehicles are excluded if capital allowances, or in the case of goods vehicles, a deduction under the cash basis, has been claimed in respect of them.

If a business elects to use the flat rate allowance then the flat rate allowance must be used for that vehicle for the remaining period during which it is in use for the purpose of the business.

The relief is calculated at a rate of 45p for the first 10,000 business miles in a year and 25p a mile after that for cars and goods vehicles (with a single 10,000 mile band for all vehicles taken together), and 24p a mile for motorcycles.

Use of home for business purposes

The deduction may be claimed if the business uses the facilities in the proprietor’s home for business use. The deduction is optional for all businesses, including those operating the cash basis, which would otherwise have to be calculated on an apportioned basis according to the payments made.

The calculation is performed on a monthly basis, and allows a deduction each month according to the number of hours spent wholly and exclusively on work done by the person or any employee in the person.

Deduction : per month or part month

Number of hours worked

Applicable amount

25 or more

£10.00

51 or more

£18.00

101 or more

£26.00

Premises used as both home and business premises

Where business premises are used mainly for the purpose of the trade, but also as the person’s home the person can elect for the flat rate of deduction to apply, whether or not they are using the cash basis of accounting. The calculation of the deduction is based on the total expenditure incurred less a flat rate private use adjustment, based on the number of occupants using the premises as a home or stays there otherwise than for the purpose of the trade.

Private use adjustment: per month or part month

Number of relevant occupants

Applicable amount

1

£350

2

£500

3 or more

£650

Businesses using the cash basis will no longer be required to use the flat rate expense allowances for business mileage. Instead they will be able to deduct the business proportion of expenditure on cars, plus the business element of capital allowances on cars.

The flat rate deductions of 45p per mile for the first 10,000 miles a year are still available as an option for all unincorporated businesses.

Budget 2013 coverage - sponsored by TaxCalc
Download Rebecca Benneyworth's detailed analysis explaining how key meaures will affect ordinary businesses.

Replies (18)

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By ver1tate
28th Mar 2013 21:54

Use of room in house for business

I have been informed by HMRC that where a room in a house is used solely for business, allowances are calculated on a direct apportionment.

One room in a six room house, one sixth of household expenses may be claimed.

Does this still hold good?

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Replying to zebaa:
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By bradburn
04th Apr 2013 10:46

use of room in house for business

You should be careful when claiming a sixth of all expenses. HMRC like you to do this - then when you sell your house a sixth of the gain will be liable to capital gains tax!

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Replying to Tax Dragon:
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By ver1tate
05th Apr 2013 21:10

use of room in house for business

This has been considered before using the apportionment method. But the way house prices are going, I do not see much of a profit on sale, and the tax allowances already received will outweigh any tax due.

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
29th Mar 2013 09:21

Not if you opt to use the cash basis

The simplified expenses regime devised to support the cash basis is designed to avoid having to go through complicated apportionments like this. The Budget TIIN on this issue explains that the Finance Bill 2013 includes clauses that will allow all unincorporated businesses to choose, on a simplified flat rate basis, to deduct: 

motoring expenses for cars, motorcycles and goods vehicles; business use of home; and, private use of business premises. 

From the wording above, it appears that the flat rate deductions are not mandatory. So if you choose to do an apportionment, that should also be acceptable to HMRC. It may be worth checking Rebecca's more detailed Budget report for confirmation - or digging into the Finance Bill clauses if you want definitive confirmation.

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Replying to charliecarne:
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By matthew pennifold
04th Apr 2013 14:33

Are you sure we can deduct private use of business premises?

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Replying to Kelly1234:
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By tim hervey
04th Apr 2013 17:48

Are you sure we can deduct...

Matthew - another misunderstanding!

The private use of business premises (e.g. a guest house) can be dealt with either as an apportionment of the actual expenses or to avoid complicated calcualtions, you can take the total actual expenses and deduct from that total a fixed rate per month based on the number of occupants.

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Replying to JamesAshford:
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By matthew pennifold
04th Apr 2013 20:56

Mis-something

tim hervey wrote:

Matthew - another misunderstanding!

The private use of business premises (e.g. a guest house) can be dealt with either as an apportionment of the actual expenses or to avoid complicated calcualtions, you can take the total actual expenses and deduct from that total a fixed rate per month based on the number of occupants.

 

Yes I know that, but read the second comment on this thread.

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the sea otter
By memyself-eye
29th Mar 2013 13:33

Hmmmm

If a sole trader working 50 hours a week with an office at home uses the flat rate scheme he/she can claim the magnificent sum of £2.30 per week (£120/year) as a deduction, OR use the apportionment rate of (say) one tenth whereby their yearly gas/electricity costs alone might be £1600 a year...

What bozo at HMRC thinks even a modest office at home only costs £2.30 a week?

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Replying to ms998:
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By rehtg
04th Apr 2013 11:30

monthly not weekly?

Are the hours not on a monthly basis, so 50 hours per week (216 hours per month) would be eligible for the £312 per annum (£6 per week) claim?  

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By mhtax
29th Mar 2013 20:18

Discriminatory

This is not even as much as an employee can claim despite not being there for as long as a self employed person may be

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Chris M
By mr. mischief
30th Mar 2013 20:03

Thank God!

If this is what happens when George Osborne simplifies the tax system, thank God he wasn't trying to make it more complex!

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Head of woman
By Rebecca Cave
02nd Apr 2013 15:14

Not mandatory and open to all

The new fixed rate expenses can be used by any unincorporated business whether or not that business opt to use the cash basis. I understand from the notes to the Finance Bill ( clause 18 and Sch 5) that only partnerships with a corporate partner are excluded from using the fixed rate deductions. Also the fixed rate deductions are clearly optional, the business can use apportionment of actual costs instead.

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By The Black Knight
04th Apr 2013 11:05

investigations joke

not That there are any

 

But you can imagine...what basis are you using sir? accruals or cash? A: I don't understand?

"Penalties? ""how can that be?" "There are two different ways of getting it right, if you can decide which method to use we can move on," "which is it then?", "don't know " You decide and I'll argue" " no you go first" "gooo on"

after 6 months of no action. we have decided in the public interest of you not giving us brain ache to let you keep the tax as we have our pensions to worry about.

 

Reasonable care: Well I tried to follow the rules but they said they were simple but they were not were they? No

We have enough trouble with clients and HMRC compliance officers with cash and invoice accounting, both of which use different methods for inputs, outputs and different periods.

I asked one officer to clarify which method she was using as it appeared she had used a varied approach. Never heard from her again, end of enquiry.

 

It's going to be fun...and simple really: If you want to pay more tax use the cash basis.

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By JL
04th Apr 2013 11:11

not true

Providing you only claim revenue expenses and not capital, HMRC have no CGT claim when you sell your home. Just remember, only claim the interest element of the mortgage.

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By matthew pennifold
04th Apr 2013 14:37

"Businesses using the cash

"Businesses using the cash basis will no longer be required to use the flat rate expense allowances for business mileage. Instead they will be able to deduct the business proportion of expenditure on cars, plus the business element of capital allowances on cars."

When were businesses using the cash basis required to use the flat rate expense allowances?

 

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Replying to lionofludesch:
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By tim hervey
04th Apr 2013 17:42

Businesses suing the cash basis...

Matthew - you've misunderstood! The original intention (and as in the draft legislation published in December 2012) for the cash basis was that you would have to use the fixed rate expense for cars but under the revised proposals and draft Finance (No 2) Bill 2013, following some policy changes, cars can be dealt with either through capital allowances and actual running costs (both with adjustment for prvate use) or as a fixed rate expense.

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Replying to Andywho is fed up:
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By matthew pennifold
04th Apr 2013 20:59

Thanks Tim

tim hervey wrote:

Matthew - you've misunderstood! The original intention (and as in the draft legislation published in December 2012) for the cash basis was that you would have to use the fixed rate expense for cars but under the revised proposals and draft Finance (No 2) Bill 2013, following some policy changes, cars can be dealt with either through capital allowances and actual running costs (both with adjustment for prvate use) or as a fixed rate expense.

 

Yes I know that, but the comment says its no longer required, which would imply it was a requirement; but it was just an intention.

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By david5541
04th Jun 2013 16:22

IS THAT ALL?

ARE THERE NOT ANY MORE FLAT RATE EXPENSES RATES? FOR THE IGNORANT( WHO CHOOSE NOT TO ADOPT THE ACCRUALS/UK GAAP BASIS) AND DO IT OFF THEIR OWN BACK RELYING TOTALLY ON HMRC OPINIONS?

sums it up mr mischief the more political interfering in the tax rules in at attempt to "make it simpler" and in fact the whole thing is made more complicated...!!!!!!!

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