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Cash basis - whose decision is it?

Cash basis - whose decision is it?

In an earlier post, a poster said they would not be using the cash basis for clients.  This post is not intended as a criticism of this comment - I am genuinely interested to hear what everyone thinks on this matter and what decisions others are coming to.

I would love to ignore the new cash basis system - "simplification" has yet again made our lives more complex.  But do you really think we can afford to ignore it?  I have a client who has a debtor of £5k at 31/3/14.  If I ignore the cash basis, he will pay nearly £1500 more tax this year.  I know there are other issues to consider too (which in this case actually mean I would not recommend the cash basis due to longer term issues), but I don't think this is a decision I can make for him.

I would be interested to hear what others think.

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26th Apr 2014 18:48

Cash Based Accounts

I believe that by and large total profits over the life of a business will be broadly similar under both the accruals and cash bases. My main concern, now that I believe it will not be possible to jump in and out of the cash system, is that in case of cash accounting there may be a wastage of the personal allowance if the opportunity for capital allowance planning is lost.

I'm happy to be convinced otherwise but in the odd case there could be a loss of around £3,000 in tax and class 4 N.I. where the personal allowance is extinguished by a large capital purchase. Hypothetically this could be repeated.

Whilst total profits may be similar, tax paid may not.

Since I'm not proposing to use this new system, there are three things I'll need to do.

(a) set out my concerns in a short letter to each client and request a signature agreeing to continue with the accruals method,

(b) state that the accruals method of accounting has been used on my certificate,

(c) keep a tally (which will be cumulative) on what profits would have been under the cash method.

Needless to say, the above will be done to cover my back in the unlikely event of a challenge from a client.

 

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27th Apr 2014 10:55

It was I who posted that.

I just think it's poorly thought out (who'd've thought that?) and too rigid.  Whilst I doubt that a personally allowance would be completely wiped out in practice, it is theoretically possible.  The reality is that traders aren't going to spend their entire income in any year on a capital asset.

Let's face it - it's been brought in so that Joe Public can report his income for Universal Credit purposes.

The whole point of the accruals basis is that your income's smoothed out and isn't distorted by, say, paying an insurance premium early.  Why the Government should think that introducing an opportunity to manipulate income is a good idea is beyond me.

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27th Apr 2014 11:33

I am not informing clients.......

........ unless they specifically ask about it.

I take the view that they pay us to decide what is best and I agree with the previous posters that the whole thing is a dogs breakfast and could well prove disastrous if used.

"Let's face it - it's been brought in so that Joe Public can report his income for Universal Credit purposes." Exactly - in a nutshell!! But I do wonder whether UC will ever really get off the ground. I reckon that it will be scrapped pretty soon.

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27th Apr 2014 11:52

To answer the question

"I have a client who has a debtor of £5k at 31/3/14.  If I ignore the cash basis, he will pay nearly £1500 more tax this year. "

Will he ?  What about your own modest fee ?  He won't be able to claim that, will he ?

To answer the question, I won't be drawing anyone's attention to this but if they ask, I'll be pointing out that - for most of my eligible clients - the difference is negligible and they run several risks owing to the rigidity of the rules.  If they insist on using it, I'll explain that I'll be sorry to lose them but to let me know their new accountant's address.

"Accountancy is an art, not a science."

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27th Apr 2014 15:02

Thanks for the replies

agreed, I will not be able to accrue for my fees, so the tax will be a bit less than £1500 but the creditors are much less than the debtors so there is a significant cash flow advantage, this year, in claiming the cash basis.  I still don't think I can make this particular decision without involving the client to some extent.  For other clients it will be a lot less significant and so less of an issue possibly.

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27th Apr 2014 19:36

I am a great believer in letting the client decide (after the options have been explained) - it is his/her money after all.

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28th Apr 2014 08:24

My worry is that what start off as timing differences become real differences.

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