Preparing your accounts for income tax purposes the cash basis

Date: 01/05/13

Preparing your accounts for income tax purposes the cash basis

You may have heard that the Government has been considering whether to allow some small businesses to compute taxable profits for the purposes of income tax on a cash basis rather than the usual accruals basis.  The Government has recently issued draft legislation to allow this option.

The cash basis can first apply for the 2013/14 tax year which means that your tax return for 2012/13, which has to be submitted by 31 January 2014, will continue to be on the same basis as in previous years.  There is therefore plenty of time for you to consider what is best for you and your business. 

The key aspects of the cash basis are that:

Small businesses would be taxed on their cash receipts less cash payments of allowable expenses.

It is only available to unincorporated businesses.

It is an optional scheme and requires an election by the owner(s) of a business.

Businesses can enter the cash basis if their receipts for the year are less than the amount of the VAT registration threshold (currently £79,000) or twice that (currently £158,000) for recipients of Universal Credit.  Universal Credit is being introduced by the Government from October 2013 and is the replacement to the Tax Credits system.

Businesses will not have an option of leaving the cash basis in future tax years unless there is a 'change of circumstances'.

Businesses must leave the cash basis the year after their receipts exceed twice the amount of the VAT registration threshold unless their receipts fall back to below the VAT registration threshold. 

This sounds simple so should you elect for it if you can?

The cash basis sounds simple but there may be significant complications depending on the nature of your business.

Points to consider from a tax perspective include:

Cash receipts include all amounts received in connection with the business including those from the disposal of plant and machinery.  The good news is that if a customer has not paid what is owed to

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