Cash-based tax accounts kick off in 2013

Unincorporated businesses beneath the VAT registration threshold will be able to start accounting for their income and expenses using a simplified cash-based regime for financial years starting from 1 April 2013.

In essence, the law will state that 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 allowed by tax law, for example on goods taken for personal use. The regime includes a series of flat rate allowances for  car expenses, use of home and interest payments. These simplified expenses allowances will also be available to businesses that do not apply the cash basis.

The government has stuck to its intention to link the cash accounts regime to the VAT registration threshold and the “three line account” limit in income tax self assessment returns. To cater for fluctuating incomes, however, businesses will be able to exceed £77,000 in a given year (or £154,000 if they receive universal benefit). But a business will have to leave the regime if its receipts go over £154,000 a year.

Key features

  • The cash accounting regime will be available to unincorporated businesses, who can chose whether or not to use it.
  • A business will have to elect to enter the regime, probably by ticking a box on their tax return.
  • A cash basis election will apply to all the businesses carried on by the taxpayer for the year in question. They will not be allowed to separate their businesses to stay within the regime; the combined receipts of all their trades will considered when assessing turnover for qualification purposes.
  • Receipts will include all amounts received in connection with the business, including income from disposal of non-durable assets and VAT refunds
  • Allowable expenses have to be incurred wholly and exclusively for the purposes of the trade, and can include non-durable assets and payments of VAT, but not business entertaining, property purchases or other “investment” assets. Interest payments are also allowed up to a limit of £500 (see below)
  • Businesses using the cash basis will not be able to claim capital allowances.
  • 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.

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no provision to prevent companies switching in and out ?    3 thanks

Mouse007 | | Permalink

Yippy, going to have fun with that loophole...

In Out In Out In Out .... It will be like making love to HMRC.

 

Pst, can we all be good now and NOT explain how that might work - I feel a gold rush of new work coming our way.

Bob Harper's picture

Excellent

Bob Harper | | Permalink

Great, I can now get cracking with a new Website that will help small businesses do their own tax for free!

Bob

Crunchers Accountants

limited companies?    1 thanks

NH | | Permalink

Am I missing something here - according to this article the key features are

 

  • The cash accounting regime will be available to unincorporated businesses, who can chose whether or not to use it.
  • A business will have to elect to enter the regime, probably by ticking a box on their corporation tax return.

Do unincorporated businesses now complete Corporation Tax Returns then?

Thats not the only place the article refers to a company being able to use this..."the regime includes a series of flat rate allowances for company cars".

maybe I am being pedantic but isnt life confusing enough

Penfold's picture

The cash accounting rules also include    1 thanks

Penfold | | Permalink

a number of excluded persons and trades, including:

  • companies

 

Oh great, one set of accounts for Companies House then and another for the tax man, what fun! The irony, legalised evasion.

 

 

Paul Scholes's picture

There you go then

Paul Scholes | | Permalink

Given the huffin & puffin on the original thread, it will be interesting to see if the world stops spinning in April.

John says that the proposals have ignored the profession's protests but let's see how many responses from us the condoc received. (good to see they listened to some with the availability of £500 in interest).

With glass half full, as mentioned above, this will give some planning opportunities.

Whilst it may not apply to companies yet, don't count your chickens, I'm convinced something like it will also apply to micros in the next few years.

 

 

Finansol Tax Calculators's picture

did you mean this?    1 thanks

Finansol Tax Ca... | | Permalink
  • A business will have to elect to enter the regime, probably by ticking a box on their corporation tax return

(have I misread something?)

carnmores's picture

lucky i never changed to accrual inthe first place    3 thanks

carnmores | | Permalink

;-)

Finansol Tax Calculators's picture

sorry NH...

Finansol Tax Ca... | | Permalink

didn't refresh the browser before posting my comment, so didn't see you'd already written same thing until after I'd posted mine

reassuring to read yours though!

John Stokdyk's picture

My mistake    4 thanks

John Stokdyk | | Permalink

Trust a bunch of accountants to be so eagle-eyed. "Corporation" has been excised from the text, and please accept my apologies for introducing the pointless error in the drafting of the article.

It may have made the piece a bit "business" heavy, but I avoided saying "company" throughout. My dozy subconscious intervened at an inopportune point.

Thanks for keeping me on the right path - I will try to do better in future.

Finansol Tax Calculators's picture

?

Finansol Tax Ca... | | Permalink

Penfold wrote:

a number of excluded persons and trades, including:

  • companies

 

Later - got it now!! The phrase 'The cash basis includes a number of excluded persons' means 'the cash basis can't be applied by certain excluded persons'!

Penfold's picture

I'm going    1 thanks

Penfold | | Permalink

to lie down in a dark room now

You're correct penfold...

Trevor Scott | | Permalink

...legalised tax evasion. Lots of "loopholes".

Am going away to bang my head against a wall.

Paul Scholes's picture

60 responses to the consultation

Paul Scholes | | Permalink

Not sure if any of the links above are to the results PDF so just in case, here it is.

38 organisations/businesses, including the accounting bodies & accountingweb + 22 individuals. I think this was better than the ESC C16 response but still it seems a bit....puny?  Still at least The Farmers Union bothered!

 

 

jon_griffey's picture

More work    2 thanks

jon_griffey | | Permalink

My old boss once told me when I was a junior that whenever they introduce change or simplification it just means more work for accountants.  This is no exception.

I doubt we are going to see hoardes of clients suddenly doing their returns themselves.  Those who can do so have largely gone already with the advent of online filing of tax returns.  I see another layer of complexity and so more opportunity for taking advantage of the rules.  It will however be of great help for clients like ebay traders, antique dealers etc who will presumably no longer need to keep a stock book which will save us a lot of time.  There is an obvious opportunity for such traders to manipulate results by buying stock just before the year end and we will earn our fees by advising them to do just that.

 

SteveOH's picture

Switching in and out? Surely not.

SteveOH | | Permalink

So, for y/e 31st March 2014 elect to use the cash based scheme. All March sales are invoiced on 31st March, cash is received in April and is therefore excluded. Purchases and stock relating to the later year are purchased in March and are therefore included.

For y/e 31st March 2015, elect to use the accruals basis and this same income and expenditure is excluded.

Keep swapping every year from one scheme to the other and HMRC are going to lose a large amount of dosh; even given the fact that this is for businesses below the Vat threshold.

On another point, I don't think that taxpayers at this level of turnover are going to do "simplified" accounts themselves. I imagine that we are still going to be asked by our clients which method is going to save more tax. And "can you do the accounts anyway because I don't understand figures".

Paul Scholes's picture

Ironically

Paul Scholes | | Permalink

I have a self employed client who I've put up with for two years, he's a lovely bloke but absolutely hopeless and so, as I'm still waiting for info I asked him for months ago, I was going to tell him I wasn't able to deal with him next year.

It's ironic that if it was this time next year, I'd have been able to send his figures in on the new basis and we'd have both been happy, also no loss of fees, so may keep my mouth shut.

Steve, you're right the switching in & out is a silly thing to allow, but I would imagine there will be some sort of sanction eventually if it's clear the transactions are being arranged just to save tax.  At the end of the day though, I still say it's up to us whether we bother, ie it's right to tell clients about this but if it's too much grief (or just plain boring) I'll advise them to find someone else or to do it themselves.

 

jon_griffey's picture

Tax avoidance is now for little people!    1 thanks

jon_griffey | | Permalink

Abuse of in-and-out is going to be rife.  The advice is to buy all your stock in year 1 and prepay all your expenses under cash accounting and sell the stock in year 2 under accruals accounting.  So essentially you get a double deduction for expenditure.

Consultancy types who can control their income will make a huge saving by getting their clients to pay up front on the last day of year 1, pay nothing in year 2 and pay in arrears on the 1st day of year 3.   The income would appear to escape taxation altogether.  Is this too easy? Have I missed something?

There may well be a demand therefore to pay the accountants to produce 2 sets of accounts each year so the client has some accruals accounts to show the bank.

Bob Harper's picture

Let it go

Bob Harper | | Permalink

Move on, compliance is dying and opportunity with this change will be temporary. It's time to look for other ways to generate revenue.

We'll be releasing business development tools and video training to help micro business grow into corporates.

Crunchers Accountants

SteveOH's picture

@jon_griffey    1 thanks

SteveOH | | Permalink

"Tax avoidance is now for the little people"

What a brilliant headline. I love it. I wonder if we are now going to get the protesters camping outside Fred the Plumbers or Joe the Greengrocers instead of Starbucks with the signs reading "Turnover £76,999 - Tax nil".

And Paul, I agree with you that there probably will be some way that they will stop the abuse of switching. It was the Government's statement that: “The choice of which basis to calculate tax should be a business decision and not constrained. The cash basis will be simpler without rules to restrict switching and the Government wishes to avoid tying businesses into the regime if it is no longer suitable for them” that made me think that they may not.

Do they honestly think that taxpayers are not going to take advantage of switching every year? It is reminiscent of the fiasco with Gordon Brown's introduction of the nil corporation tax rate band on profits under £10,000. Suddenly a rush of incorporations and then....

zarathustra's picture

I cant see how this will help the growth of UK businesses    2 thanks

zarathustra | | Permalink

The main problem I have wiith this is that I have spent the last 20 yrs trying to get gusiness to keep and understand accounts that impart meaningfull information.

These rules mean that the accounts are of limited use for  decision making. Using this rules will probably stunt the growth of business past the initial embryonic stage.

They are probably appropriate for the tiniest of businesses only.

Surely the manipulation around opting in and out cannot be as straightforward as some people on this thread have been making out, otherwise theeffects will be ludicrous.

Anomalies    3 thanks

Chris Wise | | Permalink

there are stil some references to companies doing this despite them being in the excluded categories.
Is this just preparation for small businesses and universal credit, where apparently the proprietor if claiming tax credits will have to file a monthly income and expenditure on cash basis. How will that fit if their accounts are prepared on accruals basis for SA?

.    1 thanks

ireallyshouldkn... | | Permalink

In terms of switching, surely you would have to take account of things "lost" in the transition?

I cant believe we would just ignore them? If we can. Well. That will be the Christmas gift that will keep on giving for years to come. A lovely new loophole to play with until the powers that be work out whats going on and stop it in about 3 or 4 years time.  i really really hope that isn't the case as it will be grossly unfair to gain an advantage just by switching schemes. 

But in terms of work, I agree with Jon_griffy,  it would appear there is suddenly a lot more to do. My typical sole trader clients (I don't have many) have only a few adjustments, but there is some gaming to be done here, and one off tax savings await........

 

 

 

John Stokdyk's picture

@Chris Wise - apologies/thanks

John Stokdyk | | Permalink

Really sorry about those rogue "companies" in the text - I should have done a search/replace before posting the text. I seem to have developed a pavlovian problem around this and will now administer electronic shocks should I ever repeat the error.

They have now been excised.

How is this simpler?

Ian Bee | | Permalink

As far as I can see, switching just to save tax will be allowed but there will be provsions to prevent the same income being taxed and the same expenses being relieved more than once.

We will need to calculate the tax on both cash and accruals basis annually to work out the most beneficial way, including making the necessary adjustments after a switch, so how does this simplify matters or take away red tape?

Simplified Accounts ?    1 thanks

alanwhitehouse | | Permalink

 

Whatever the final workings of the cash basis - most thoughts ( HMRC, Practioners, etc) seem  not to mention the important point that the main reason a business should keep full accrual accounts is to know if its worth doing ( i.e. is making a profit.) as said the bank should want to know this. As we all know cash flow & profit loss are completely different animals.

Having said that we could end up providing 2 sets of accounts one for HMRC and one to actualy run the business

 

 

carnmores's picture

@JohnS

carnmores | | Permalink

if you cant have a sweet sherry at this time of the year when can you .....

Impact on mortgages    2 thanks

djrand | | Permalink

Another point is that many banks etc require an SA302 to verify income. So on the cash basis, the client is showing a low profits figure to save tax but then can't get a mortgage!

squay's picture

What about CIS?    1 thanks

squay | | Permalink

There is no mention of sub-contractors whose tax is deducted at source. There are not listed in the excluded trades. So do they just declare their net income and still get a deduction for the cis tax? They'll save a packet! If they are prohibited from claiming the deduction for tax paid they will be much worse off. It just won't work.

Remember two sets of accounts = two lots of fees

allan613 | | Permalink

The best clients accountants have are: 

(1) the bank - how is the client going to get their overdraft re-newed / increased if they haven't made a profit, and backed by a professional set of accounts? (not one produced on the back of fag-packet!), and 

(2) the Revenue - how are you going to work out the tax to pay?, because the client in 90%+ cases haven't the foggiest idea what to do, and in more cases than not put their foot in 'it' trying to explain things when they have submitted their 'accounts'!

 

 

No backwards claims for    1 thanks

fpdbookkeeping | | Permalink

No backwards claims for opening year losses. No capital allowances (including AIA I guess). Think I can see what is going on there.........

The other point is that this could be largely academic. I doubt a bank would lend based on figures produced in this way, and would probably require the business to have GAAP accounts prepared.

Big fuss over very little..

Ian McTernan CTA | | Permalink

Let's face it, the amounts involved in any savings aren't going to be that big- remember the turnover limits for this scheme are very low, so most shops will be over the limit to apply the scheme for a start.

Most businesses in the sub-VAT bracket aren't going to need fancy accounts anyway, and most probably use the cash basis now anyway.

Full accruals basis accounts shouldn't be that much different for this size of micro business- and I'm pretty sure there will be a pile of rules to prevent switching resulting in a one off gain in the taxpayer's favour.

Will this reduce my workload- no, if anything I now have another thing that I can charge clients more for 'consideration of the basis on which to prepare your accounts' XXX ££.

My bigger concern at present is RTI, which looks like a real mess in the making.

Unused personal allowances should be carried forward    1 thanks

philfromleeds | | Permalink

I read you can not claim capital allowances. That means you put the whole asset through as an expense if it has no private use. Lets say a Van or a Taxi.

You then have a thumping loss or you are in the grey area of a small profit under the personal allowance threshold.

Under this system can we carry forward unused personal allowanes?

From my experience I know many businesses that could loose out and the tax man knows this. At the end of the day the tax man will go to bed knowing he is making and the guy who has been often forced into self-employment becuase he is unemployed or unemployable will loose out.

johnjenkins's picture

Sorry folks    1 thanks

johnjenkins | | Permalink

the in and out method won't work as a loophole.

Under SA all income and expenditure are to be used only once (Mrs. Wembly). That was one of the features when SA was set up. So when you switch there will be an automatic adjustment (just like when year end changes or cessation) so that unaccounted for income and expenses are taken into consideration. There will probably be a box to tick and a figure to put in on the CT600 (sorry John).

Cash Accounting

les hale | | Permalink

What about traders who give credit, such as jobbing builders.

They could be below VAT threshold but one year invoice a largish job but not get paid until the next year and at the end of the next year invoice another largish job and get paid in the same year. First year profits on a cash basis could be less than personal allowance and next year profits into higher rates of tax!! I understand that switching is to be allowed but this is ridiculous!!

Another thing - what about allowability of our accountancy fees normally done on an accruals basis - no allowance in first year if none paid on a cash basis and lost if paid after cessation.

Perhaps a good excuse to get paid loads up front for our work then after cessation of trader's business we give back any overpayment which becomes tax free in traders hands!!

What a load of "old tosh"!!!

Mileage?

1796971 | | Permalink

So if s/e choose to go down this road, then they'll be expected to keep a proper mileage log, with detailed days/journeys? (like the ltd co's)

As opposed to x% of total receiptable expenses?

This and being unable to properly claim any loss as with current rules?

No thanks!

Although offering the client to do two accounts/tax calculations to see which is better = more fees - perhaps not so bad!

 

 

 

 

rohit's picture

Relevance

rohit | | Permalink

zarathustra wrote:

These rules mean that the accounts are of limited use for  decision making. Using this rules will probably stunt the growth of business past the initial embryonic stage.

They are probably appropriate for the tiniest of businesses only.

zarathustra has made a very good point. The main purpose of producing accounting information is not solely about working out your tax liabilities but driving the business strategy using meaningful MI.

With the cash accounting basis (very small companies excluded), the accounts will be rendered useless. Basically compromising the relevance and reliability principles...

Banks will still want to see information prepared under the accruals concept so in some cases perhaps client will get stung with two sets of fees!

pembo's picture

dept of lunacy (again)

pembo | | Permalink

presumably this has been dreamt up by the same guys who think you can introduce RTI reporting for the self employed.Bottom line is that the only way someone is going to know if they're better off under this is to compare it against the position under GAAP.And who exactly is going to do that ? Most clients in this target audience don't know the difference between a P&L and a balance sheet. So  I guess that means... er...us that means...er... double the work ? As ever disingenuous spin designed to make it appear that they are trying to deregulate small business and be helpful.

Another thought.Wonder whether if RTI comes in for the self employed they will be able to jump in and out of the cash basis/GAAP on a monthly basis and then decide on what annual basis to report when they do their tax returns ? But then of course RTI is again all about simplication for when UC comes in. Silly me.

Thank God I'm near retirement.

I think Ian Mc makes the

justsotax | | Permalink

most valid point, most businesses who fall within this bracket are likely to use a cash accounting method anyway, and probably at best just require income & expenditure accounts (and are highly unlikely to benefit from anything more detailed, and unlikely to pay for it anyway)....these same people are unlikely to be using the accounts to do analysis on their business plan (if they have one) vs the accounts etc.

 

There will always be exceptions....but in this case much ado about nothing...

It could have been simpler

djw090 | | Permalink

In France they have a simpler system for small unincorporated sole traders.

They pay a reduced rate of tax on the sales value measured on a cash basis. So in effect a standard return on sales percentage is being assumed. Much like their simplified property income arrangements.

Like the UK proposal it is optional.

My reading of how these cash accounting proposals have been reported is that you do not get a deduction for capex on a cash basis and you don't get capital allowances either. Have I understood that correctly?

exempt bodies from "cash accounting opt out"

david5541 | | Permalink

Finansol Tax Calculators wrote:

Penfold wrote:

"a number of excluded persons and trades, including:

  • companies

 

Later - got it now!! The phrase 'The cash basis includes a number of excluded persons' means 'the cash basis can't be applied by certain excluded persons'!"

sad to say with the bbc payroll/contractors/"talent" scandal AND STARBUCKS amazon google-and vodafone and Arcadia(phillip green) eroding our tax base this  idea will make an inspectors' job alot easier together with allowing the further expansion of  all the "bucket shop" tax shops/franchises

Paul Scholes's picture

Another vote for Ian and storm in a teacup    3 thanks

Paul Scholes | | Permalink

I agree with his comment above.  I know many will see this proposal as designed specifically to attack and annoy accountants (paranoia rules) but I think you'll find the government probably had the thousands of busines in mind who don't use accountants...in fact, at this end of the business community, I'd guess most don't use (or need) accountants.

There will be a few on the fringe (accountants as well as taxpayers) who might spend hours manipulating dates of transactions and accruals & prepayments to delay £27.84 of tax & NI from one year to the next but this is probably because they find it more interesting than train spotting.

 

The Down-side Side of that Coin...

I'msorryIhaven'... | | Permalink

SteveOH wrote:

So, for y/e 31st March 2014 elect to use the cash based scheme. All March sales are invoiced on 31st March, cash is received in April [2015] and is therefore excluded. Purchases and stock relating to the later year are purchased in March [2014] and are therefore included.

For y/e 31st March 2015, elect to use the accruals basis and this same income and expenditure is excluded.

Keep swapping every year from one scheme to the other and HMRC are going to lose a large amount of dosh.

 

Great idea, except there's a down-side in y/e 31st March 2014 and y/e 31st March 2016, and for that matter any other year that you switch from accruals-based to cash-based accounts. Using the dates in your example, above:

y/e 31st March 2013: debtors (say) £3,000 included in sales income of accruals-based accounts;

y/e 31st March 2014: receipts of that same £3,000 included in sales income of receipts-based accounts.

In other words, when "swapping" you'd be double-taxed on any closing debtors figure featured in your biennial accruals-based accounts. (Which rather makes you wonder just who, in the ordinary course of things, would want to elect to switch to cash-based accounts in the first place. Would you, if you were facing double-taxation on the year-end 31 March 2013 debtors in your small practice?). 

In a similar vein, any purchases made in March 2014 on credit would most certainly be excluded from that year's cash-based accounts and, arguably, ought also to be excluded from the following year's [y/e 31 March 2015's] accruals-based accounts. In other words, such purchases could end up featuring in neither set of accounts.

All of which could open up a whole new genre of tax avoidance planning services for micro-clients, advising them as to the timing of their receipts and payments (eg offering discounts to their customers to get them to pay on the dot [in March] some years, and take their time others; or by timing their payments for purchases). Lord knows how all that would dovetail with Universal Credit; even more planning opportunities to maximise that particular government handout, perhaps?     

carnmores's picture

the usual load of old humbug

carnmores | | Permalink

keep things in proportion

Glennzy's picture

What about Stocks

Glennzy | | Permalink

Do you still account for stocks or simply take off what you have spent on purchases from income in your first year then assume a level stock going forward.

SteveOH's picture

There is no stock

SteveOH | | Permalink

There is no stock carried forward as there is no balance sheet. So, as you say, money received less money spent (which will include that spent on stock not used).

Double or Nothing?

I'msorryIhaven'... | | Permalink

SteveOH wrote:

There is no stock carried forward as there is no balance sheet. So, as you say, money received less money spent (which will include that spent on stock not used).

Or which could exclude that spent on stock (whether used or unused) that is bought on credit at the end of a cash-based year, when payment is made in an accruals based year following.

That's the converse situation of including stock (ie purchases) twice: once when it is bought on credit at the end of an accruals based year; and once again when it is paid for in the cash-based year following.

Glennzy's picture

So In Theory

Glennzy | | Permalink

So In Theory a general store /Newsagent or similar lifetsyle buisness thats starts from scratch and makes £20k (accruals)  profit but may have £10k stock on hand would therefore pay no tax in year one as his personal allowance would almost cover the £10k profit he would make. Surely HMRC would be all over him like a rash as his margin would look ridiculous. I see this clearly hasn't been thought through and will be a shambles as if people decide to "self asses" they will have all sorts included in the costs, capital items HP payments the lot. I can see it only working for the simplest of businesses like a 1 man taxi firm or such.

.

ireallyshouldkn... | | Permalink

@Glenzy, yes that's how it works. And from the shop owners point of view it will be less confusing as the tax bill is based more or less on their drawings from the business which having talked to such people for years is how most non-accountants think. 

Yes things like margins wont make any sense but quite frankly accruals accounts often mean very little to the client anyway...

Yes if they DIY or use some of the quasi-accountants who stick the numbers on the forms without understanding the legislation behind it it will probably not be quite right.

But do HMRC care? Nope, so long as they get a decent slice of tax, whats missing falls out next year and they can dumb down the level of staff required to review it on investigation (have you spoken to the numpties who do flat rate VAT?) then all is fine. 

Glennzy's picture

@Ishould Really Nnow

Glennzy | | Permalink

To be honest i will be suprised if its something that is taken up in any great numbers. Most buisnesses of that size are usally cash based and the only accrual going into the accounts is for accountancy fee so its no big deal. Any small service or consultancy business that invocies on credit will presumably use some sort of bookkeeping software and will probably just mess things up trying to remove debtors etc from figures for what will be only a small gain in year 1

I dont know anyone who went onto flat rate VAT scheme as they are all obsessed they will lose out on it somewhere down the line. I still think that anyone trying to save on accountant fees will get into a right mess trying to do it themselves inclusing there own "wages" as costs etc.

The best advice we can give

Henry_AIMS | | Permalink

The best advice we can give is to use a professional accountant. Our business model has been successful because our accountants visit you at a place that suits you and don't charge the earth. You can find more about AIMS Accountants for Business on our website: www.aims.co.uk   

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