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.
Following consultation, government made the cash-based regime voluntary and made no provision to prevent people switching in and out of the cash basis.
In a document detailing the responses to the proposal, Treasury minister David Gauke commented: “We want the smallest businesses to be able to choose the method of accounting that works best for their business. The simplified system will provide this flexibility, give greater certainty, and simplify the tax calculations for many small businesses.”
While small business representatives were in favour of extending the regime, accountants were not so keen to see generally accepted accounting principles (GAAP) overturned, with a potential loss of business as a result. Even the Office of Tax Simplification, which devised the measure with sub-£30,000 turnover businesses in mind, voiced concern about extending it to the VAT registration threshold and beyond.
However, 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.
The government decided against any legislative restrictions on switching in and out of the cash accounting regime, arguing: “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.”
Any business using the cash basis would be able to switch to the normal tax rules if it wanted to obtain sideways relief or any other features of the normal rules that are not available in the simpler cash basis, the government said.
Flat rate allowances have been devised for the following types of expenditure under the regime:
- Car and vehicle expenses will be based on business mileage rather than deductions for actual expenditure on purchasing, maintaining and running a vehicle or motorbike. The rate will be based on HMRC’s approved mileage allowance payments (AMAP), currently 45p a mile up to 10,000 miles, then 25p/mile, with 24p/mile for motorbikes.
- Expenses relating to business use of home can be deducted for each month, according to the amount of time spent working at home: 25-50 hours per month - £10; 51-100 hours per month £18; 101 hours or more per month - £26. Business will still have the option to claim any allowable portion of actual expenses.
- After consultation, an allowance of up to £500 will be available for interest payments.
For most trades, the cash basis will remain optional, with the exception of barristers. The existing alternative rules for barristers will be removed, and they will have to fall in with the wider cash accounting rules. However the restriction will not apply for those who already use the existing barrister rules, which apply for seven years, or for those who are eligible and choose to use this accounting approach for the 2012-13 tax year. They will be allowed to continue using the special regime for seven years.
The cash accounting rules also include a number of excluded persons and trades, including:
- limited liability partnerships
- Lloyd’s underwriters
- businesses with a current herd basis election
- dealers in securities
- ministers of religion
- intermediaries treated as making employment payments
- managed service companies
- waste disposal
- cemeteries and crematoria.
How cash accounting will work
The cash accounting regime for 2013-14 will be based on a financial year ending on any date between 31 March 2014 and 30 April 2014, with the subsequent tax year starting on the next day.
The business will need to record all amounts received relating to the supply of goods, services and self-employed work. Receipts will have to include tips, commissions, goods and services received in kind and any refunds for deductible expenses, including of VAT repayments. Sale proceeds for anything that could be deducted as an expense and any grants or Business Support Allowance will also have to be included.
Property or other asset sales that would not be deductible as expenses would not be counted as receipts under the cash regime, nor would bank loans and other finance.
Outgoing expenditures for business use, including stock for sale, equipment, software, rent, wages and VAT paid out should be recorded and offset against income. Where expenses are claimed for items also used privately, only the amount relating to business use should be claimed.
Payments for business entertaining, or purchases of long-lasting assets such as cars and properties are not allowable. Instead the taxpayer should apply the flat-rate expenses detailed above.
Accountants will have to learn to live with it
Along with the big jump in the audit exemption threshold criteria, the cash accounting regime is one of the major planks in the government’s crusade against red tape. For practitioners, however, these measures appear to be designed more to undermine their businesses, and provoked long and anguished protests on AccountingWEB during the consultation period.
Member vowlesj summarised the feelings of many when he complained in June, “Isn’t [the cash basis] just a proliferation of rules for no good result? Very small businesses tend to prepare income and expenditure accounts on what amounts to a cash basis anyway, so will this new legislation actually achieve anything apart from extra costs and complexity.”
Bob Edwards took a more positive stance and argued that practitioners should use the simplified regime as an opportunity to offer additional tax planning and business advice in the time that would otherwise be devoted to preparing accounts.
Since the government paid little attention to the profession’s protests and unless there's a major parliamentary or electoral meltdown in the next seven months, his suggestion is about the only tactic practitioners have left to cope with the new rules.
Further reading on cash accounting
You might also be interested in
AccountingWEB’s interim Editor in Chief has been with the site since 1999 and returned to the editorial hot seat in March 2020 to lead the hunt for a long-term successor... Send a DM if you're interested! When not tending to the needs of AccountingWEB members and geeking out on their technology habits, he devotes much of his time to his oddball...