In December 2012, the government announced that small businesses will be able to adopt a simpler tax system from 1st April 2013 or the 2013/14 tax year. It is available to self-employed individuals or partnerships carrying on the smallest trading businesses. They will be able to choose to be taxed on the basis of receipts less payments. All unincorporated businesses will also be able to use simpler rules for some business expenses.
The purpose of the cash basis and simplified expenses is to make it easier for the smallest businesses to calculate their taxable income. The cash basis is a simpler tax system, designed for business which do not need or want to prepare accruals accounts for business purposes. Small businesses using the alternative basis will be taxed on their receipts less payments of allowable expenses, rather than being asked to spend their time doing accounting adjustments and other calculations designed for larger or more complex businesses. However, it will not be appropriate for every small business.
The main points of the Cash Basis are that:
- it is an optional scheme which small unincorporated businesses can elect to use
- businesses can enter the cash basis if their receipts for the year are less than the amount of the VAT registration threshold (currently £77,000) or twice that (currently £154,000) for recipients of Universal Credit. Businesses must leave the cash basis after their receipts exceed twice the amount of the VAT registration threshold (currently £154,000)
- it will work on a cash flow basis. For income, it’s what the business receives, when it is received; for outgoings, it’s what the business pays, when it pays in receipts include all amounts received in connection with the business including those from the disposal of non-durable assets and VAT refunds
- allowable payments are expenses paid wholly and exclusively for the purposes of the trade, including for non-durable assets and payments of VAT (but excluding business entertaining and purchase of property or other “investment” assets. It will no longer be necessary to calculate and claim capital allowances. Interest payments are also allowed up to a limit of £500
- 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
- rules on entering or leaving the cash basis are intended to ensure that income is taxed once and once only and expenses are relieved once and once only.