20 Jul HMRC Cash Accounting – April 2013
From 1 April 2013, the self employed have been able to account for their income and expenditure on a cash basis. Limited companies are not able to use the scheme.
Under the previous HMRC system, self employed individuals were required to account for income and expenses as they were incurred. This is known as accrual accounting and can be time consuming for small businesses. Here’s a very simple example to illustrate this:
Let’s say you invoice a client for work you carry out for them in March 2018 but the client does not actually pay you until May 2018, which is when the money reaches your bank account. You would need to account for this income during the 2017-2018 tax year because this is the period the income was earned, i.e. March 2018.
The new system will allow you report the income in the period it was received, May 2018 in this example, which falls into the 2018-2019 tax year and therefore you will pay the tax on that income later than before.
No. The scheme will certainly make accounting simpler for small businesses but it does not mean that those businesses will pay less tax.
Small businesses that are unincorporated and with income of £150,000 or less are able to choose whether to use the simplified cash based scheme. You can stay in the scheme up to a total business turnover of £300,000 per year.
The main differences of the new system compared to the previous system are summarised by HMRC as follows:
- 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 – use a standard rate instead.
What are the pitfalls of the cash basis scheme?
Capital allowances cannot be claimed. Expenditure on assets used in a business is allowable under the cash basis but certain types of capital expenditure are still excluded.
Purchases of long-lasting assets such as cars and properties are not allowable. Business losses can only be carried forward to set against the profits of future years and not carried back or offset against other sources of income as they can currently.
Interest payments are only allowed up to a limit of £500.
Expenditure on vehicles – a standard fixed rate allowance can be claimed which will replace relief for actual expenditure on purchasing, maintaining and running a motor vehicle. Any small business using the cash basis must claim this way.
Use of home for business purposes – optional for those businesses using cash accounting.
Premises used for both home and for business purposes – optional for those business using cash accounting.
Yes you can although if two separate trades are taking place is the combined income total of both trades that will determine whether you are eligible to join the scheme.