Cash accounting for unincorporated businesses

What does this mean?

At present all accounts submitted to HMRC should be prepared under UK accounting standards even if you are self-employed.  This means that your accountant will make changes to your basic figures to convert your data to comply with UK accounting standards (so called GAAP accounting) before the data is included in your tax return.

Overview of the proposals

Eligable businesses, that is partnerships and the self-employed can elect to use the cash accounting system.

All you will have to do is:

  1. tick a box on the tax return; and
  2. make up your accounts to a date between 31st March in the tax year and 30th April immediately after the end of the tax year.

Who is eligible?

The self-employed and partnerships but not companies or Limited Liability Partnerships.

Your business receipts must also be under the VAT threshold, currently £79,000.  Recipients of Universal Credit (coming in the Autumn) can join the scheme if their business receipts are less that twice the VAT limit, that is £158,000 at the time of writing.

If  a business is VAT registered then the measure of receipts includes VAT.

You must leave the scheme once your business receipts exceed twice the VAT threshold i.e. £158,000.

How do the calculations work?

Step 1

Calculate the total amount of receipts of the business received during your tax year, known as basis period (this need not be the 6th April to 5th April)!  This includes sales as well as assets such as equipment.

Step 2

Deduct your expenses as set out in the new rules.

Business expenses paid and interest paid up to £500 will be deductible.

Business assets purchased will be deductible apart from a few excluded assets.  Excluded assets will include cars and vans.

Business entertaining expenses will not be deductible (as is the case under the full tax legislation)

The new rules will cover fixed rate deductions for:

  1. the use of a motor vehicle;
  2. the use of home as office;
  3. and the private use of business premises (for example when running a guest house).

Who is likely to use cash accounting?

If your business is largely cash based it may be easier to use cash accounting than preparing full accounts.

There may be cashflow advantages, if you have customers that a very slow to pay you will not be taxed until the customer pays.

Who is likely to stay with current accounting systems?

As with all legislation there will be winners and losers.  If you purchase goods on credit you will not get a tax deduction until you pay for the goods.

Also, if your business is likely to make a loss in any year, but particularly in the first years’ of your business when losses are more likely you will not be able to use your business losses against other income.  So, for example, if you were made redundant and decided to set-up your own business.  Any loss you make under the cash accounting system could not be used to set against your employment income. The current GAAP accounting would allow you to make this set off and get a refund of tax from HMRC.

The second area that may be less favourable will be cars and vans.  There will be no deduction for the purchase price of a van or car.  You will have to use a fixed rate deduction set at 45p per mile for the first 10,000 business miles and 24p thereafter.

What do you need to do?

Well nothing right now.  You can make the choice when you complete your tax return.

You like the idea but you trade as a limited company?

If you like the sound of cash accounting but you incorporated your businesses a number of years ago to take advantage of Gordon Brown’s 10% small company tax rate then help may be at hand.  For a limited period (a few years) HMRC are going to provide a “disincorporation relief”.  Clearways Accountants will be writing on this soon.

Your accountant should make two calculations and advise you on the best alternative.  If you need help in preparing cash and GAAP accounts then you should talk to your accountant or come and talk to us at Clearways Accountants on 01737 244298.

Universal credit

Please note that the monthly cash reporting required by the self-employed under universal credit uses a different calculation than this one offered by HMRC – you have been warned!