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.
- 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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Further reading on cash accounting
- HMRC information note: Simpler income tax for the simplest small businesses (43kb PDF)
- HMRC technical note 11 Dec 2013 (176kb PDF)
- Simpler Income Tax for the Simplest Small Businesses - summary of responses (182kb PDF)
- Cash accounting - AccountingWEB coverage and debates