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Cash Basis for Small Businesses

Newsletter issue - April 2013.

The cash basis was also mentioned in the 2013 Budget announcements, but now we have some more details.

In an attempt to simplify accounting and tax reporting for the smallest businesses, from 6 April 2013 small businesses can choose to calculate profits/losses on the basis of the cash received and expenses paid out. This is known as the cash basis, and it ignores debts owed by the business and amounts owing to the business, until those amounts are paid. The normal accounting method is known as the accruals basis.

The cash basis will only be available to businesses which operate as sole-traders or partnerships, and whose turnover is under the VAT registration threshold (£79,000 from 1 April 2013). Some other businesses will be barred from using the cash basis and these include:

  • All companies and LLPs;
  • Farmers using the herd basis;
  • Any business using profit averaging over several tax years;
  • Businesses in a mineral extraction trade; and
  • Lloyd's underwriters.

Once a business is using the cash basis it can carry on doing so until its annual turnover is twice the VAT registration threshold (£158,000 from April 2013).

Although apparently simple, the cash basis will have some disadvantages:

  • The deduction for loan interest paid will be limited to £500 per year; and
  • Losses can only be carried forward to set against future profits, whereas under the accruals basis losses can be carried back in the first four years of the trade and set off against the trader's other income.

In addition any unincorporated business, whether or not they are using the cash basis, will be able to use flat rate expenses to replace the calculation of actual costs incurred in these categories of expenses from 6 April 2013:

  • Motoring costs (mileage at 45p per mile);
  • Use of home for business purposes (based on number of hours used per month); and
  • Private use of part of commercial premises, such as a public house (based on number of occupants who are business owners or their immediate family)

As these flat rates are completely optional, and will vary in effect in each business, we need to discuss whether these flat rates will be suitable for your business.

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