Gabelle Tax Analysis: Cash accounting for small businesses – what the new proposals mean

Cash accounting for small businesses – what the new proposals mean

On 18 May HMRC issued a summary of the proposals for cash accounting for smaller businesses, setting out the main points contained in the consultation document.

It is proposed that cash accounting will be available for unincorporated businesses (apart from property businesses) with a turnover of less than £77,000. Any business that adopts cash accounting can remain in the scheme until the turnover exceeds £150,000.

The cash basis will differ from the normal tax rules, which require an accruals basis of accounting, in the following respects:

  • No need to understand rules designed for larger businesses
  • No need to pay tax until cash is received
  • No need to keep complicated records (for example, stock, debtors and creditors), over and above those needed to run a business effectively
  • No need to understand capital allowances
  • No need to keep detailed records for certain key expenses – a standard rate will be used instead.

Instead of capital allowances, the cost of most plant and equipment and vans will be written off when incurred. However this does not apply to cars, for which a mileage allowance would be available.

There will also be an allowance for use of a home.

HMRC seem keen to get as much input as possible from interested parties before the proposals are implemented and this latest document encourages small businesses to participate in the consultation process, and in particular to comment on the following questions:

  • Do you think the entry limit of £77,000 and the exit limit of £150,000 are appropriate?
  • If you don’t think the entry and exit limits above are appropriate, why not?
  • If you don’t think the proposed entry and exit limits above are appropriate, what figures would you suggest instead?
  • What are the pros and cons, as well as any other implications, of the cash basis? Please list these.

Cash accounting is likely to be attractive to many small businesses, as record keeping can be kept to a minimum.

Cash accounting will enable small businesses to get automatic bad debt relief as sales are recorded only when cash is received. Conversely, relief will be available for actual expenditure, although this is under the control of the business.

Compliance costs are likely to be reduced, although many small businesses will still require assistance, particularly in completing their annual tax returns.

There could be a big culture shock when businesses are forced out of cash accounting when their turnover exceeds £150,000, so accountants may need to spend more time preparing businesses for the move to an accruals basis of accounting.

Businesses that grow beyond the £77,000 threshold for VAT registration will also need to bear in mind that although they could remain on the cash accounting scheme, they will have to keep sufficient records for VAT purposes.

Paul Howard is a Director at Gabelle LLP. He can be contacted at paul.howard@gabelletax.com or via TaxDesk on 0845 4900 509.